UNIT THREE

MONEY – FORMS AND FUNCTIONS

OBJECTIVES:

This unit will help students to:

o get acquainted with types and functions of money

o improve their use of money-related vocabulary

LEAD-IN

Key Concepts

Money is any good that is widely used and accepted in transactions involving the
transfer of goods and services from one person to another.

Types of money:
o commodity money – Commodity money is a good whose value serves as the
value of money. Gold coins are an example of commodity money. In most
countries, commodity money has been replaced with fiat money.
o fiat money – Fiat money is a good, the value of which is less than the value it
represents as money. Dollar or Euro bills are an example of fiat money
because their value as slips of printed paper is less than their value as money.
o bank money – Bank money consists of the book credit that banks extend to
their depositors. Transactions made using checks drawn on deposits held at
banks involve the use of bank money.

Functions of money:
Money is often defined in terms of the three functions or services that it provides.
Money serves as a medium of exchange, as a store of value, and as a unit of
account.

Medium of exchange.

Money serves as a medium of exchange because people are willing to accept it in

exchange for goods and services, which facilitates transactions and exchanges.
Without money, all transactions would have to be conducted by barter, which
involves direct exchange of one good or service for another. The difficulty with a
barter system is that in order to obtain a particular good or service from a supplier,

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one has to possess a good or service of equal value, which the supplier also desires. In
other words, in a barter system, exchange can take place only if there is a coincidence
of wants between two transacting parties. The likelihood of a double coincidence of
wants, however, is small and makes the exchange of goods and services rather
difficult. Money effectively eliminates the double coincidence of wants problem by
serving as a medium of exchange that is accepted in all transactions, by all parties,
regardless of whether they desire each others' goods and services.

For money to be used in this way, it must possess a few crucial properties:
1. It must be divisible—easily divided into usable quantities or fractions .
2. It must be portable—easy to carry; it can’t be too heavy or bulky.
3. It must be durable – strong enough to resist tearing and the print can’t wash
off if it winds up in the washing machine.
4. It must be difficult to counterfeit; it won’t have much value if people can make
their own.

Store of value.

In order to be a medium of exchange, money must hold its value over time; that is, it
must be a store of value. If money could not be stored for some period of time and
still remain valuable in exchange, it would not solve the double coincidence of wants
problem and therefore would not be adopted as a medium of exchange. As a store of
value, money is not unique; many other stores of value exist, such as land, works of
art, and even baseball cards and stamps. Money may not even be the best store of
value because it depreciates with inflation. However, money is more liquid than most
other stores of value because as a medium of exchange, it is readily accepted
everywhere. Furthermore, money is an easily transported store of value that is
available in a number of convenient denominations.

Unit of account.

Money also functions as a unit of account, providing a common measure of the value
of goods and services being exchanged. Knowing the value or price of a good, in
terms of money, enables both the supplier and the purchaser of the good to make
decisions about how much of the good to supply and how much of the good to
purchase.

(adapted from www.cliffsnotes.com)

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VOCABULARY DEVELOPMENT

1. The terms below are used to describe forms and functions of money. Match
each term with its explanation. Refer back to the information in the Lead-in
section, where some of the concepts are explained:

1. Banknote
2. Coin
3. Denomination
4. Legal tender
5. Medium of exchange
6. Money
7. Representative money
8. Store of value
9. Token money
10. Unit of account

a. a function of money which allows people to calculate the value of the

transactions they make and to keep accounts;
b. a function of money which makes it generally acceptable as a means of
payment for the acquisition of goods and services;
c. a function of money which makes it possible to delay of the acquisition of
goods, because the value of the goods is stored in the money received for
them;
d. a medium of exchange that functions as a unit of account and a store of
value;
e. an item of metal currency issued by the central bank;
f. an item of paper currency issued by the central bank;
g. cash;
h. money from bank accounts;
i. money that must be accepted as a means of payment in a certain area;
j. the value printed on a monetary unit.

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 1 2 3 4 5 6 7 8 9 10

2. Complete the table with characteristics from the list below:

Types of Representative money Token money

money Coins Banknotes Bank accounts

Characteristics

accepted only in the country of origin difficult to

difficult to transport forge durable
easy to transport high value
liable to theft light
low value non- movable across the world at high
durable physical speed non-physical money
money portable
the owner is known the owner is offered anonymity

3. Complete the gaps in the sentences below with verbs from the box:

borrow; earn; invest; lend; pay; save; spend; waste; win.

a. Most people work because they need to money.

b. If you go shopping, you money.
c. If you want to get products or services you have to be willing to for
them with cash or a credit card.
d. If you don’t use your money carefully, you it.

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 e. When people haven’t got enough money available, they it from
friends or from the bank.
f. If you want to money, you put it in the bank, or you it in a
company, and hope the company is successful.
g. Many people think of what they will do if they _ a lot of money at the
lottery.
h. If you don’t pay your debts on time, nobody will you money the next
time you need it.

SELF-ASSESSMENT TEST

1. Answer the questions below:

a. What are the main functions of money?

b. What is the difference between representative money and token money?

2. Fill in the gaps with words from the box:

bank; banknotes; coins; denominations; deposits; forge; legal tender;

money; representative; token.

When people want to obtain goods or services they have to offer (1) in
exchange. Money is generally accepted in payments, acting as (2). There
are several types of money. (3) are metallic money and are usually made
of base metals, but they can also be made of silver or gold for higher (4).
(5) are printed on paper and are issued by central banks. They are easy
and cheap to transport and difficult to (6). Banknotes and coins are
(7) money, as contrasted to bank _ (8), which are called
(9) money. This type of money is instantly transferable to any part of the
world where there is a correspondent _(10), is not usually liable to theft
and is available in any unit of value.

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3. Choose the correct word to complete the sentences below:

1. Many member countries of the European Union have already introduced the euro.
Their national currencies are no longer .
a. good money b. legal money c. legal tender
2. In countries which are not members of the European Union the euro is .
a. a foreign currency b. strange money c. foreign money
3. He has a good salary, but he also has a lot of , so he can’t save much.
a. paying b. expenses c. payout
4. Banknotes and coins represent .
a. reserves b. capital c. cash
5. Money paid by the government to unprofitable companies is called .
a. subsidy b. deposit c. aid
6. The dollar and the euro are .
a. monies b. currencies c. funds
7. When you have money in your bank account, this means that you it.
a. owe b. own c. lend
8. If you have taken money from someone and you have to give it back, this means
you money.
a. owe b. own c. lend
9. Offering money to people for a limited period of time, after which you expect
them to pay it back, is called .
a. borrowing b. lending c. crediting
10. Taking money from people for a limited period of time, after which you must pay
it back, is called .
a. borrowing b. lending c. crediting

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