The function of money that enables individuals to exchange goods and services in a common unit of account is called:
A) medium of exchange.
B) store of value.
C) unit of account.
D) measure of power.
The correct answer and explanation is :
The correct answer is C) unit of account.
Explanation:
Money serves several important functions in an economy, which include being a medium of exchange, a store of value, a unit of account, and a standard of deferred payment. Each of these functions is crucial for the effective operation of economies around the world. Let’s break down the functions of money, specifically focusing on the unit of account:
- Unit of Account: This refers to money’s role as a standard measure of value that allows individuals and businesses to compare the value of different goods and services. It enables prices to be set and for people to make decisions based on the relative value of products and services. When money is used as a unit of account, it acts as a common yardstick that makes it easy for buyers and sellers to communicate about the value of goods and services. Without a unit of account, there would be no common framework for evaluating and comparing the worth of items, which would create confusion in exchanges.
- Medium of Exchange: This function refers to the role of money in facilitating transactions. It is what people use to buy and sell goods and services. It eliminates the inefficiency of barter systems, where goods must be exchanged directly for other goods. Instead, money acts as an intermediary, making trade smoother and more efficient.
- Store of Value: Money can be saved and retrieved later for future use. This function ensures that money retains its value over time, allowing people to defer consumption until a later date.
- Measure of Power: This is not one of the recognized functions of money in economics. Money can influence purchasing power, but “measure of power” isn’t an established term in economic theory.
In summary, the unit of account is the function of money that allows people to compare the value of goods and services, making it essential for clear pricing, budgeting, and economic decision-making.