DAS A UNIT OF ACCOUNT, MONEY ACTS AS A COMMON BASIS FOR FINANCIAL...

As a unit of account, money acts as a common basis for financial transactions and accounting. Imagine the

difficulty in trying to use oats to pay back a loan you received in bananas.

Money’s function as a store of value means that money enables value to be stored and transported. When

money is defined as a medium of exchange, it means that money simplifies transaction costs. Money must

be commonly recognized and universally accepted for it to serve as a good medium of exchange. Another

basic function of money, that of unit of account, means that money allows consumers to compare the value

of goods. The liquid asset function of money means that money converts easily into other goods. The

statement that begins, “Money’s value is ..” should continue, “..inversely related to the level of prices.” The

value of a unit of money is measured in terms of what can be purchased with the unit. An increase in the

level of prices and a decline in the purchasing power of a unit of money are the same thing. The statement

about paper money is partially true - it allows consumers to defer consumption and encourages division of

labor. It is not necessarily the best store of value. Other assets may provide a better hedge against inflation

or greater price appreciation (real estate, for example).