Assignment on

Functions of Money

Course Code: FIN 321

Course Title: Money and Banking.

Prepared By

Name: Md. Rifat Alam

ID No: 18300038

Batch: 14th

Prepared For

Name: SM Akber

Lecturer

Department of Business Administration

RANADA PRASAD SHAHA UNIVERSITY (RPSU)

Date of Submission: 11-December-2020

Contents Page
number

Introduction 1

The Economics of Money, Banking, and Financial Markets 2

Money- Investopedia 3

Functions of money in the modern economic system- 4

Summary 5

Reference 6
 Introduction to Money

Economists define money as anything that is generally accepted in payment for goods or
services or in the repayment of debts. Currency, consisting of dollar bills and coins, clearly fits
this definition and is one type of money. It is an economic unit that functions as a generally
recognized medium of exchange for transactional purposes in an economy. Money provides the
service of reducing transaction cost, namely the double coincidence of wants. Money is a liquid
asset used in the settlement of transactions. It functions based on the general acceptance of its
value within a governmental economy and internationally through foreign exchange. The current
value of monetary currency is not necessarily derived from the materials used to produce the
note or coin. Instead, value is derived from the willingness to agree to a displayed value and rely
on it for use in future transactions. This is money's primary function, a generally recognized
medium of exchange that people and global economies intend to hold, and are willing to accept
as payment for current or future transactions. In order to be most useful as money, a currency
should be: fungible, durable, portable, recognizable, and stable. Money originates in the form of
a commodity, having a physical property to be adopted by market participants as a medium of
exchange. It is commonly referred to as currency. Economically, each government has its own
money system. To define money merely as currency is much too narrow for economists. Because
checks are also accepted as payment for purchases, checking account deposits are considered
money as well. An even broader definition of money is often needed, because other items such as
savings deposits can, in effect, function as money if they can be quickly and easily converted
into currency or checking account deposits. As you can see, no single, precise definition of
money or the money supply is possible, even for economists.

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 Functions of money

The Economics of Money, Banking, and Financial Markets

-Book by Frederic Mishkin

Functions of Money: Whether money is shells or rocks or gold or paper, it has three
primary functions in any economy: as a medium of exchange, as a unit of account, and as a store
of value. Of the three functions, its function as a medium of exchange is what distinguishes
money from other assets such as stocks, bonds, and houses.

➢ Medium of Exchange: In almost all market transactions in our economy, money in the
form of currency or checks is a medium of exchange; it is used to pay for goods and
services. The use of money as a medium of exchange promotes economic efficiency by
minimizing the time spent in exchanging goods and services. To see why, let’s look at a
barter economy, one without money, in which goods and services are exchanged directly
for other goods and services. Take the case of Ellen the Economics Professor, who can do
just one thing well: give brilliant economics lectures. In a barter economy, if Ellen wants
to eat, she must find a farmer who not only produces the food she likes but also wants to
learn economics. As you might expect, this search will be difficult and time-consuming,
and Ellen might spend more time looking for such an economics-hungry farmer than she
will teaching. It is even possible that she will have to quit lecturing and go into farming
herself. Even so, she may still starve to death. The time spent trying to exchange goods or
services is called a transaction cost. In a barter economy, transaction costs are high because
people have to satisfy a “double coincidence of wants”—they have to find someone who
has a good or service they want and who also wants the good or service they have to offer.
Let’s see what happens if we introduce money into Ellen the Economics Professor’s world.
Ellen can teach anyone who is willing to pay money to hear her lecture. She can then go to
any farmer (or his representative at the supermarket) and buy the food she needs with the
money she has been paid. The problem of the double coincidence of wants is avoided, and
Ellen saves a lot of time, which she may spend doing what she does best: teaching. As this
example shows, money promotes economic efficiency by eliminating much of the time
spent exchanging goods and services.

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 Money

- Investopedia

Money is an economic unit that functions as a generally recognized medium of

Functions of money:

➢ Unit of account: Due to its use as a medium of exchange for both buying and selling
and its use to assign prices to all kinds of other goods and services, money can be used
to keep track of the money gained or lost across multiple transactions, and to compare
money values of various combinations of different quantities of different goods and
services mathematically. This makes things such as accounting for profit and loss of a
business, balancing a budget, or valuing the total assets of a company all possible.
➢ Store of Value: Because money's usefulness as a medium of exchange in transactions
is inherently future-oriented, it provides a means to store value obtained through
current production or trade for use in the future in the form of other goods and services.
In particular trading their non-fungible, non-durable, non-portable, non-recognizable,
or non-stable goods or services for money here and now, people can store the value of
those goods to trade for goods at other times and places. This facilitates saving for the
future and engaging in transactions over long distances possible.
➢ Standard of Deferred Payment: To the extent that money is accepted as a general
medium of exchange and serves as a useful store of value, it can be used to transfer
value for exchange use at different times between people through the tools of credit
and debt. One person can loan a quantity of money to another for a period of time to
use, and repay another agreed-upon quantity of money at a future date. The stored
value represented by the loaned money is transferred from the lender to the borrower in
exchange for an agreed quantity of stored value in the future. The borrower can then
use and enjoy the value of other goods and services that they can now purchase in
exchange for payment at a later date.

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 Functions of money in the modern economic system

- IndianMoney.com Research Team

Money is a fundamental invention of mankind. With this invention of money, various

Functions of Money: Here are some important functions of money in an economy:

➢ The Medium of Exchange: The primary function of money is that it acts as a medium of
exchange. It is an efficient way to remove inconveniences of barter system. It is freely
accepted for purchase or sale of any goods. It eliminates double coincidence of wants and
can be directly exchanged in the market.
➢ A Measure of Value: It is an instrument that acts as a measure of value. Money can be
used as a standard of measurement which was absent in case of barter. The amount of
money that needs to be paid for the purchase of a good is the price of the product. And the
price is nothing but the value of the product in monetary terms. Therefore, the value of the
good depends on the price we pay for it. Thus, money makes calculations easier.
➢ A Store of Value: A big disadvantage that comes with barter is the store of value. If we use
commodities and store it then they lose their value after a certain time. Thus, commodities
cannot be used to store wealth. Money is a better alternative and can be used as a store of
value. You can store money and secure your future as it can be used at a future date as
well. Money also does not lose value unlike commodity if stored over a period. Thus, you
can hold money for an extended tenure and use it to finance future purchases.
➢ The Basis of Credit: Since money can be stored, it can be used to give credit. Thus,
borrowers can obtain money from the lender and repay it as per the terms of the loan. He
can use the money to obtain goods and services and thus one can fulfil their requirements
by borrowing money. Money also facilitates trade and business to a large extent is
dependent on credit.

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 Summary

Economists define money as anything that is generally accepted in payment for goods or
services or in the repayment of debts. Money is commonly referred to as currency.
Economically, each government has its own money system. money primarily functions as a
medium of exchange. In almost all market transactions in our economy, money in the form of
currency or checks is a medium of exchange; it is used to pay for goods and services. The use of
money as a medium of exchange promotes economic efficiency by minimizing the time spent in
exchanging goods and services. However, it also has developed secondary functions. Unit of
account is one of them which is the second role of money. Money provides a unit of account;
that is, it is used to measure value in the economy. We measure the value of goods and services
in terms of money, just as we measure weight in terms of pounds or distance in terms of miles.
using money as a unit of account lowers transaction costs in an economy by reducing the number
of prices that need to be considered. Another function of money is store of value. it is a
repository of purchasing power over time. A store of value is used to save purchasing power
from the time income is received until the time it is spent. This function of money is useful,
because most of us do not want to spend our income immediately upon receiving it, but rather
prefer to wait until we have the time or the desire to shop. The basis of credit is another function
of money. money can be used to give credit as it can be stored. So, borrowers can obtain money
from the lender and repay it as per the terms of the loan. He can use the money to obtain goods
and services and thus one can fulfil their requirements by borrowing money. Money also
facilitates trade and business to a large extent is dependent on credit.

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 Reference

Ref 1- Frederic S. Mishkin (n.d.) The Economics of Money, Banking, and Financial Markets, 11th edition.:
Pearson.
(http://dl.rasabourse.com/Books/Finance%20and%20Financial%20Markets/%5BFrederic_S._Mishkin%5D_Eco
nomics_of_Money%2C_Banking_%20and_%20Financial%20Markets%28rasabourse.com%29.pdf)

Ref 2 -
https://www.investopedia.com/terms/m/money.asp#:~:text=international%20exchange%20oppor
tunities.-,Functions%20of%20Money,a%20standard%20of%20deferred%20payment

Ref 3- https://indianmoney.com/articles/functions-of-money-in-the-modern-economic-system