a. Define the purpose and function of money
Money has three purposes in the economy:
First, it is a medium of exchange in economic transactions, by which one party compensates for the other’s goods or services, instead of traditional means such as barter and gold.
Second, individuals can store value in money instead of physical assets. When money is saved, it can be used for future transactions and be exchanged against goods or services that are not needed at the moment.
Third, money is a measurement unit for accounting purposes. That is, since money represents value, the worth of any asset of liability can be stated in money value. This function is essential for understanding the economic significance of an item, either tangible (e.g. machine) or intangible (e.g. goodwill). Another important use of money in this context is the ability to plan budgets and to understand the economic meaning of a business process. Continue reading