1. Describe the four functions of money, using the U.S. Dollar to provide an example of how dollars serve each function. 2. First Bank has cash reserves of 200,000 loans of 800,000 and deposits of 1,000,000. If the bank maintains a reserve requirement of 12 percent, what is the largest loan it can make? What is the maximum amount by which the money supple can be increased as a result of First Bank’s new loan? Solution 1. Money is anything which is generally acceptable as a medium of exchange. Functions of money are: a) Medium of Exchange: It means that money acts as a medium for the sale and purchase of goods and services. In the absence of money, goods were exchanged for goods. This required double coincidence of wants. Accordingly, an exchange was difficult, and therefore limited. The introduction of money has separated the acts of sale and purchase: a double coincidence of wants is no longer required. Dollar is directly used to purchase various goods and services in the market. b) Measure of Value or Unit of Value: Money serves as a measure of value in terms of unit of account. Unit of account means that the value of each good or service is measured in the monetary unit. Measurement of value was very difficult in the barter system: one good was valued in terms of the other. There was no common unit of value. An introduction of money has removed this difficulty. Now, each good is valued in terms of money. Value of each good like car is valued in dollar terms i.e. $ 200,000. c) Standard of deferred payments: Deferred payments refer to those payments which are made sometimes in the future. When we borrow money from somebody, we have to return both the principal as well as interest amount. It is difficult to make such transactions in terms of goods and services. Money performs this function most effectively. c) Store of Value: Store of value implies store of wealth. Storing wealth has become considerably easy with the introduction of money. Stored wealth is a source for future investment. It was not convenient to store value in the barter system of exchange because goods tend to wear out or perish. On the other hand, it is convenient to store value in terms of money because money has the merit of general acceptability, value of money remains relatively stable compared to other commodities. Dollar can be stored for future use without any difficulty. d) Transfer of Value: Money also serves as a convenient mode of transfer of value. Goods are purchased from far-off places both for consumption as well as investment..

1. 1. Describe the four functions of money, using the U.S. Dollar to provide an example of how
dollars serve each function.
2. First Bank has cash reserves of 200,000 loans of 800,000 and deposits of 1,000,000.
If the bank maintains a reserve requirement of 12 percent, what is the largest loan it can make?
What is the maximum amount by which the money supple can be increased as a result of First
Bank’s new loan?
Solution
1. Money is anything which is generally acceptable as a medium of exchange. Functions of
money are:
a) Medium of Exchange: It means that money acts as a medium for the sale and purchase of
goods and services. In the absence of money, goods were exchanged for goods. This required
double coincidence of wants. Accordingly, an exchange was difficult, and therefore limited. The
introduction of money has separated the acts of sale and purchase: a double coincidence of wants
is no longer required. Dollar is directly used to purchase various goods and services in the
market.
b) Measure of Value or Unit of Value: Money serves as a measure of value in terms of unit of
account. Unit of account means that the value of each good or service is measured in the
monetary unit. Measurement of value was very difficult in the barter system: one good was
valued in terms of the other. There was no common unit of value. An introduction of money has
removed this difficulty. Now, each good is valued in terms of money. Value of each good like
car is valued in dollar terms i.e. $ 200,000.
c) Standard of deferred payments: Deferred payments refer to those payments which are made
sometimes in the future. When we borrow money from somebody, we have to return both the
principal as well as interest amount. It is difficult to make such transactions in terms of goods
and services. Money performs this function most effectively.
c) Store of Value: Store of value implies store of wealth. Storing wealth has become
considerably easy with the introduction of money. Stored wealth is a source for future
investment. It was not convenient to store value in the barter system of exchange because goods
tend to wear out or perish. On the other hand, it is convenient to store value in terms of money
because money has the merit of general acceptability, value of money remains relatively stable
compared to other commodities. Dollar can be stored for future use without any difficulty.
d) Transfer of Value: Money also serves as a convenient mode of transfer of value. Goods are
purchased from far-off places both for consumption as well as investment.