Money has a major influence on the lives of most people. The more money a person makes, the more goods he can consume and services he can afford, which typically translates into a higher standard of living. Money, also called currency, is said to have three major functions in an economy.
Medium of Payment or Exchange
One of the functions of money is that it acts as a medium of payment or exchange in an economy. When you work at a job, you expect to be paid in currency that you can readily spend on things youneed such as food, gas and other goods and services. Money provides a means of exchanging goods and services throughout an economy that does not depend on bartering, making it easier to buy and sell. For instance, it might be more difficult for you to buy what you need if you were paid in the products your company produced rather than money.
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Unit of Account
Money also functions as a unit of account, meaning it is provides a measure of the value of a good or service and a means to record and reconcile financial transactions. Placing a number on the value of a good allows goods to be more easily compared. This allows people that may not know anything about a certain good or service to immediately gauge how costly it is.
Store of Value
A third function of money is that it acts as a store of value over time. When you get money, you don't have to use to use it right away. You can save it and exchange it for goods and service at a later time. Since money retains its value, it is a measure of wealth. The more money you have saved up, the wealthier you are. Money must maintain value over time for it to be effective. If a currency experiences rapid inflation (price levels in the economy increase) money can become an ineffective store of value, which may cause individuals to exchange money for other world currencies or stores of value such as precious metals.
Money tends to be regulated by the governments of the countries that use the money. For instance, the U.S. Treasury has the ability to print more money. Monetary policy (the policies a government makes with respect to the supply of money) can impact the value of money. In general, the more money a government creates, the less valuable each unit of the money will become.