The Function of Money


What is the function of money? Simply put, money is an item that is used as a medium of exchange. Its primary function is to store value that comes from current trade and production. It also serves as a means of deferred payment and stores value. Money serves many other functions, including being a store of value and a means of exchange. Here are some reasons why it is a valuable commodity:

When interest rates rise, money’s nominal value falls. The real value of money is determined by how much people hold, and when people hold more, prices fall. When the quantity of money on the market falls, the real value of money goes down. When this happens, inflation is the result. Money becomes less valuable, and prices rise. When a nation’s output exceeds its capacity, it becomes worth less than it is. However, a rise in prices decreases the purchasing power of money, thus making it a desirable commodity.

The Federal Reserve measures money supply using three monetary aggregates: M1, M2, and M3. The former measure includes only money that can be spent directly. The latter is considered a broader measure of money. M3 includes currency, checkable deposits, and near monies. In addition, M2 includes the amount of money that can be converted into spendable funds. Combined, these three measures measure the total money supply. In the U.S., M1 and M2 are the most common measurements of money supply.

Without money, economies would be forced to barter with each other, which requires a double coincidence of wants. Using money eliminates the double coincidence of wants, making it easier to carry out transactions. With money, people can freely exchange goods and services. In barter economies, this is a highly inefficient method of exchange. In these cases, the buyer and seller end up with two different goods. And it’s not just goods and services that exchange hands.