Question : 11.6   Essay: What Is Money? 1) Define money and list its : 1227836

11.6   Essay: What Is Money?

1) Define money and list its functions.

Answer:  Money is any commodity or token that is generally accepted as a means of payment. It has three main functions. It serves as a medium of exchange, a unit of account, and a store of value.

Topic:  Money

Skill:  Level 1: Definition

Section:  Checkpoint 11.1

Status:  AA

2) List and define the three functions of money.

Answer:  The three functions of money are a medium of exchange, a unit of account, and a store of value. A medium of exchange is an object that is generally accepted in exchange for goods and services. A unit of account is an agreed upon measure for stating the prices of goods and services. A store of value is anything that can be held and later exchanged for goods and services. Money serves all three of these functions.

Topic:  Functions of money

Skill:  Level 2: Using definitions

Section:  Checkpoint 11.1

Status:  CT

3) What is barter? What is a double coincidence of wants? How does the existence of money affect barter?

Answer:  Barter is the direct exchange of one good or service for another. Barter is inefficient because it requires a “double coincidence of wants,” that is, the good one person offers for exchange must be the good the trading partner wants and the trading partner’s good must be what the first person wants. The existence of money means that we do not need to engage in barter. Instead, we can sell a good or service for money and then use the money to purchase another good or service we desire. There is no necessity for the “double coincidence of wants” because the seller is willing to accept money from any buyer.

Topic:  Barter

Skill:  Level 2: Using definitions

Section:  Checkpoint 11.1

Status:  WM

4) Explain which of the following count as money.

a.a check in Ann’s checkbook

b.currency in Ann’s bank

c.currency in Ann’s purse

d.Ann’s checking deposit

Answer:  Only parts (c), currency in Ann’s purse, and (d), Ann’s checking deposit, are money. Ann’s check, given in part (a), is a method of transferring money from Ann to someone else. Thus the check (itself) is not money. Part (d), the currency in Ann’s bank, is not money until someone withdraws it because currency inside a bank does not count as money.

Topic:  Money

Skill:  Level 1: Definition

Section:  Checkpoint 11.1

Status:  NAU

5) What is fiat money?

Answer:  Fiat money is objects that are money because the law declares them to be money. Today’s money is fiat money. In past times, money used to be items, such as salt or gold, that had an intrinsic value, that is, a value of their own outside of their role as money.

Topic:  Fiat money

Skill:  Level 1: Definition

Section:  Checkpoint 11.1

Status:  MR

6) “Even though we can convert them into money, deposits at banks are not money.” Is the previous statement correct or not?

Answer:  The statement is incorrect. Some deposits at banks, such as checkable deposits, are a means of payment and fulfill all the functions of money. These deposits are therefore money.

Topic:  Deposits

Skill:  Level 2: Using definitions

Section:  Checkpoint 11.1

Status:  WM

7) Are checks money?

Answer:  Checks are instructions to transfer funds from one person’s checking account to another person’s checking account. Checks are not money, but the checking account deposits that the check transfers are money.

Topic:  Checks

Skill:  Level 2: Using definitions

Section:  Checkpoint 11.1

Status:  CT

8) “Credit cards are considered money because they serve to purchase goods and services.” Is the previous statement true or false?

Answer:  The statement is false. Credit cards are an ID card that, when presented, allow the owner to get an immediate loan. A loan is not money because a loan needs to be repaid with money. Thus a credit card is not money.

Topic:  Credit card

Skill:  Level 2: Using definitions

Section:  Checkpoint 11.1

Status:  DMC

9) Are credit cards or debit cards money? Explain your answer.

Answer:  Neither credit cards nor debit cards are money. Credit cards are a type of ID card that, when presented, allow the owner to get an immediate loan. The loan is not money; indeed, it must be repaid using money. A debit card allows the customer to pay immediately for his or her purchase by transferring money from the customer’s checking account to the seller’s account. Debit cards are similar to checks insofar as they are essentially instructions to move money from one person to another. The funds transferred are money, the debit card is not money.

Topic:  Credit card, debit card

Skill:  Level 2: Using definitions

Section:  Checkpoint 11.1

Status:  MR

10) What makes up M1? Is M1 larger or smaller than real GDP?

Answer:  M1 is the sum of currency held by individuals and businesses plus checkable deposits owned by individuals and businesses plus traveler’s checks. All the assets in M1 are accepted as means of payment and so all the assets are money. M1 is much smaller than real GDP. Real GDP is about 7 times larger than M1.

Topic:  M1

Skill:  Level 1: Definition

Section:  Checkpoint 11.1

Status:  MR