The Multiplier, Growth and Money and Banking: Question 1

Worked solution

Step 1: Recall the functions of money

Money performs four distinct functions:

• Medium of exchange. It is accepted in exchange for goods and services, removing the need for a double coincidence of wants.
• Unit of account. It provides a common measure in which prices and values can be expressed and compared.
• Store of value. It holds its purchasing power over time, so wealth can be kept in money form and spent later.
• Standard of deferred payment. It allows debts and future payments to be fixed in monetary terms today.

Step 2: Check option C

In option C, the saver is not spending the $2,000 immediately, nor is she comparing prices, nor is she settling a pre-agreed future debt. She is simply holding money so that its purchasing power is preserved and available for a purchase years later. This is exactly the store of value function: money is being used to carry wealth forward through time.

Step 3: Rule out options A, B and D

• Option A: handing over cash to buy a coffee is money being used immediately in a transaction. This is the medium of exchange function, not store of value.
• Option B: pricing the jacket in dollars so it can be compared with the coat is money being used as a common measure of value. This is the unit of account function.
• Option D: agreeing to repay a loan in fixed instalments over time is money being used to fix the value of a future obligation agreed today. This is the standard of deferred payment function, which is about pre-agreeing the monetary value of deferred payments, not about holding wealth for oneself.

Final answer

Option C. Keeping money in an account so its purchasing power is preserved for a future purchase illustrates money acting as a store of value, which is distinct from money being spent now (medium of exchange), used to compare prices (unit of account), or used to fix the value of a future debt repayment (standard of deferred payment).