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Unit 4

4.3 Definition, Measurement, and Functions of Money

2 min readseptember 23, 2020

Jeanne Stansak


Money can take several forms. One form is what we call fiat money. Fiat money is something that serves as money or currency and has no other important uses. Examples of fiat money include our paper money and coins. Another form of money is called commodity money. Commodity money is something that performs the function of money and has an alternative, non-monetary use. Some examples are gold, silver, oil, precious metals, and tobacco.

Functions of Money

There are three functions of money: medium of exchange, unit of account, and store of value.
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In order for something to be considered money, it has to satisfy these three functions. There are various examples of each of the functions. A high school senior depositing his part-time salary into a savings account is an example of the function store of value. Another example of store of value is a bank investing $10 million into a portfolio of stocks and bonds.
An example of the unit of account function is when a name-brand good is twice as expensive as a similar, generic good. A retired couple spending $9000 on a month-long European vacation is an example of the function: medium of exchange.

Measurements of the Money Supply

Different types of money are placed into categories based on what they include, their liquidity, and what function they typically perform. One thing that is not considered money is a credit card. A credit card is actually a short-term loan with excessive interest rates.
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