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Money, Banking and Households: Question 6

Syllabus 3.1

Multiple choice 1 mark

Aiko runs a small stall selling handwoven baskets. Today she sold three baskets and was paid $60 in cash. Rather than spending all of today's earnings straight away, Aiko deposits most of the $60 into her savings account, planning to use it to buy more materials in three months' time.

Which function of money is best illustrated by Aiko depositing her earnings to use again in three months' time, rather than spending them today?

Choose an answer to check it, then compare with the worked solution below.
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Worked solution

Step 1: Identify what Aiko is actually doing

The sale itself, where Aiko hands over baskets and receives $60 in cash, is the moment money acts as a medium of exchange. The question is not asking about that moment, though. It is asking about what happens next, when Aiko chooses to hold most of that $60 unspent for three months rather than using it immediately.

Step 2: Match the action to the correct function

Store of value is the function of money that describes its ability to hold purchasing power over time, so that someone can receive money now and still be able to spend it on goods of similar value later. By depositing her earnings and waiting three months before buying materials, Aiko is relying on money keeping its value in the meantime, the defining feature of the store of value function.

Step 3: Rule out the other options

  • Medium of exchange (option A) describes money being used directly to buy or sell something, this already happened at the point of sale, not in the deposit-and-wait behaviour the question asks about.
  • Measure of value (option B) describes money acting as a common unit for comparing the prices of different goods, nothing in the scenario involves Aiko comparing prices.
  • Standard of deferred payment (option D) describes money settling a debt at a future date, such as agreeing to pay a bill next month. Aiko is not delaying a payment to someone else, she is holding her own money to spend later.

Final answer

Aiko is holding money unspent so that it keeps its purchasing power for three months, which is the store of value function, option C.