For each of the scenarios listed below, determine if this is an example of money
ID: 1145174 • Letter: F
Question
For each of the scenarios listed below, determine if this is an example of money serving as a medium of exchange, unit of account, or store of value. (1=medium of exchange, 2=unit of account, 3=store of value)
____________Sarah uses her debit card to purchase lunch for her and her friends at Rooster’s Grill.
____________At Rooster’s Grill, Sarah and her friends compare which entrée to order based on the prices listed on the menu.
____________The manager at Rooster’s Grill writes a check to pay his workers each Friday.
____________Beth takes her tips from Rooster’s Grill and saves them in a hot-pink piggy bank on her dresser.
Explanation / Answer
Hello!
Of all the functions that money has, medium of exchange, unit of account and store of value are of prime importance.
Medium of exchange: You can simply understand this function by recalling one of the key drawbacks of barter system (exchange in terms of goods) ie. double coincidence of wants. In this, you had to find the person who has what you want and is also willing to exchange that in return of what you have. This was a tedious task. But money as a medium of exchange has a fixed value and thus can be used to purchase any amount of commodity from any seller.
Unit of account: By using money as a unit of account, we can express the value of all the goods and services in terms of a common denomination ie. rupee in India, euro in England, etc. This helps in comparing different commodities through price ratios and keeping business accounts. (Hence the name!)
Store of Value: As a store of value, money can be used to make future transactions and can be used to store wealth in the most convinient and liquid form. In barter system, goods had to be stored for future transactions but their perishable and bulky nature caused a lot of problems. The value of money doesn't change and is only affected through inflation and deflation which is common for everyone and hence the real value remains the same.
Now that we have understood all the functions, we are ready to answer the above query.
a) Medium of exchange (1): Money can be in any form like notes, coins, debit card, credit card, or bank checks. We need to identify what role it is playing in the current situation. Here, money is being used to purchase someting and hence it is acting as a medium of exchange.
b) Unit of account (2): All the goods are now expressed in common unit of measure ie. their prices in particular currency and can be compared through price ratios. This is possible as money acts as a common unit for all goods and services. This is the reason that Sarah and her friends are able to compare the prices listed on the menu.
c) Medium of exchange (1): Remember that getting paid for providing services is also a form of exchange as the two commodities being exchanged here are services and payment in form of money. Therefore, money in form of cheque is acting as a medium of exhange for services that the workers are providing at Rooster's Grill.
d) Store of Value (3): Since Beth is saving her tips which are in form of money, hence money is acting as a store of value here. This money can be used to make future tansactions and is therefore transferring the purchasing power from present to future.
I hope you understand now. :)
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