How Money Is Used For Each Of Its Three Principal Functions

1. Provide a practical example of money being used for each of its three principal functions. Money has three principle functions; it is a medium of exchange, unit of account and a store of value (Mishkin, 2016). An example of money being used as a medium of exchange is when money is used to pay for goods or services. It is easier to exchange money for goods and services than it is to barter your services by finding someone who has what you need and needs what you have. An example of money being used as a unit of account is when money is used to measure value. Money standardizes the value of items so we have a common measure. In referring the bartering world, we know how much money the farmer would need to pay his doctor bills, as†¦show more content†¦M2 includes all of the components of M1 and additional assets such as small-denomination time deposits, savings deposits and money market deposit accounts, and money market mutual funds shares (Mishkin, 2016). The largest difference between M1 and M2 is its liquidity. M1 are very liquid assets. These forms of money could be converted very easily for the use of purchasing goods or services. M2 is less liquid than M1 but are still able to be turned into cash quickly. For example of M2, a certificate of deposit (small-denomination time deposit) can be cashed in with very little expense, but is still not as liquid as currency or money accessible in a checking account (Mishkin, 2016). 3. (a) What distinguishes the money market from the capital market? Two of the most commonly used components of the financial markets are money markets and capital markets. The biggest distinguishing factor between these two markets is on the basis to maturity of the securities traded in each market (Mishkin, 2016). Money markets deal with short term debt instruments- less than one year and capital markets deal with debt instruments – typically greater than one year and longer, as well as equity instruments (Mishkin, 2016). (b) Are these U.S. markets partially integrated into international markets? Explain. Yes, the U.S. money markets and capital markets are partially integrated into