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MONEY AND THE BANKING SYSTEM

Unit 1. READING AND TRANSLATION PRACTICE

THE FUNCTIONS OF MONEY

Money, with its special. characteristics, serves many important economic functions.

Money is anything that people commonly accept in exchange for goods and services. Money has three basic func­tions. It serves as a medium of exchange, a standard of value, and a store of value. Anything that serves any of these three functions is a type of money.

Medium of exchange. The single most important use of money is as a medium of exchange. A medium of exchange is any item that sellers will accept in payment for goods or serv­ices. As a medium of exchange, money assists in the buying and selling of goods and services because buyers know that sellers will accept money in payment for products or services.

Standard of value. The second use of money is as a standard of value. That is, money provides people with a way to measure the relative value of goods or services by comparing the prices of products. In this way, people can judge the relative worth of different items such as a television and a bicycle. They can also judge the relative values of two different models or brands of the same type of item by comparing their prices.

Money's function as a standard of value is also important to record keeping. Businesses need to figure profits and loss es. Similarly, governments must be able to figure tax receipts and the cost ofexpenditures. Money, because it helps provide some uniformityto these accounting tasks, is also called a unit of accounting.

Store of value. The third function or role of money is that it can be saved or stored for later use. For money to serve as a store of value, two conditionsmust be met. First, the money must be nonperishable.That is, it cannot rot or otherwise deterioratewhile being saved. Second, it must keep its value over time.In other words, the purchasing powerof the money must be relatively constant. If both of these conditions are met,many people will accumulate their wealthfor later use. If not, most people will be hesitant about saving money today that will be worth little or nothing tomorrow.

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