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We tend to think of money as coins and paper. Coins and paper are currency , which is a representation of money. Money can be represented (“expressed”) by just about anything, as long it meets three key functions : Medium of exchange. A basic function of money is that it is used as a medium of exchange . That requires the thing being used as money be widely accepted by a society as a method of payment. Unit of account. Another basic function of money is to provide a common standard for defining and comparing the values of dissimilar objects . Money provides that because it has a common measure of value. For example, in a barter economy you’d have to “ask how many cookies, socks, or gallons of gas would it take to trade for that concert ticket?” Money functions as a way to state a standardized value which is understood by both parties to a transaction. Store of value. A key function of money is to store value . Money enables value to be saved, stored, and retrieved over time. That enables the accumulation of wealth . Wealth can‘t truly be achieved with things like grain or food because their value can’t be saved – it declines over time. The Characteristics of Money Money has certain characteristics . Unlike functions , characteristics are not essential to a thing's qualification as money , but you will find many of them present in money: Durability: Money circulates among the public for several years. It must be able to withstand physical wear . It cannot easily decompose, deteriorate, or degrade over time. Paper money may seem fragile, but it’s not. A $1 bill circulates in public for an average of six years. Limited Supply: How would you feel if you woke up one morning and the $100 you earned the day before was now worth only $50? A society must be able to rely on the purchasing power of money from day to day. Money shouldn’t be worth X one day and Y the next. Stability of value is very important. If money is everywhere and easy to get, its value will not be stable. One of the characteristics of money, and a key concept of financial literacy, is that money is issued in limited supply in order to maintain stability of value. In the U.S., the Federal Reserve Bank (“the Fed”) is responsible for controlling the money supply. The Fed is the bank for the U.S. government. It manages currency, money supply, interest rates and monetary policy. (Students will learn more about the Fed in a later lesson.) Divisibility: A characteristic of money is that it is divisible into smaller units without loss of value . For example, you can exchange a $20 bill for any combination of $10, $5, and $1 bills – all the way down to quarters, dimes, nickels – even pennies! Divisibility enables a buyer to use the same commodity in increments for all values and prices. Transportability: What good is money if you can’t carry it to the mall? A characteristic of money is that it’s generally easy to transport , not too large or heavy. The ability to convert money into larger denominations improves transportability. It’s a lot easier to carry five $100 bills than 500 $1 bills, or $500 in quarters! SLIDE 3H PRODUCT PREVIEW
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Lesson 3 | Show Me the Medium of Exchange
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