What are the functions of money, and why are they important?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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There are generally said to be three main functions of money.  All of them are important.  Let us examine them. 

Money serves as a medium of exchange.  What this means is that you can give people money and they will give you goods or services in exchange.  This is very important because it makes economic activity easy.  It is much easier than if you were to have to barter in order to get the things that you need.

Money serves as a measure of value.  It is easy for us to know how much something costs when we have money.  We can say that a car, for example, costs $20,000.  We do not have to estimate how many chickens or how many bushels of hay we would need to exchange to get a car.  Everything can be valued in money.

Money serves as a store of value.  What this means is that money can remain valuable over time.  If you have a pig, for example, it will not hold value because it will die.  Money, by contrast, tends to remain valuable over time.

These are the main functions of money.  All of these functions must be fulfilled in order to have money that helps us with economic activity.

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