Question

1)What are the three functions of money? Can you give an example of each from your daily life?

2)What is fiat money? Why does fiat money have value (or not have value)?

3)Construct a basic T-account for a bank operating under a fractional reserve system.

4)What is the present value of $15,000 that you will earn five years from now? (Assume that the risk-adjusted rate of interest is 10 percent. What if you earn the $15,000 two years from now?

Answer 1

The three functions of money are as follows:

1. Medium of Exchange - Money is used as a medium for transactions like buying and selling of goods. In our daily life we purchase using money which is one of the prime functions of money.
2. Store of value - Since its value does not change over time, it is stored as asset. For instance our bankings and investments that we do are a good example of store of value.
3. Unit of account - It is used to measure the relative worth of goods and services. For example we use money to measure the value of other goods and make the transactions. For instance 1 litre of milk we purchase is measured by the value of money correspondingly.

These are the three basic functions of money with examples.