For anything to be recognized as money, it needs to have which of the following characteristics? 1. Act as an intermediate in the exchange process 2. Standard unit for quoting prices 3. Must be easily divisible 4. Have higher value in alternative uses Select the correct answer using the code given below.

Correct — C, 1, 2 and 3. Acting as an intermediate in exchange is the medium-of-exchange function, the one that frees trade from the double coincidence of wants. Serving as a standard unit for quoting prices is the unit-of-account function, which lets every good be priced against one yardstick. Easy divisibility is one of the physical properties good money must have, so that a note or coin can settle a small transaction as readily as a large one. Statement 4 inverts a real requirement: money should have little or no value in alternative uses, because if the material were worth more melted down or consumed it would leave circulation, exactly as silver coins vanished from circulation when the metal price rose above the face value.

• (a)1, 2 and 4 — Keeps the inverted statement about higher value in alternative uses and drops divisibility, which is a genuine requirement.
• (b)2 and 3 only — Drops the medium-of-exchange function, which is the first and most basic thing money does. Nothing that fails statement 1 is money at all.
• (d)1, 3 and 4 — Drops the unit-of-account function and keeps the inverted one. Quoting prices in a common unit is what makes economic calculation possible.

Money is defined by what it does. The three classical functions are medium of exchange, unit of account and store of value, to which textbooks often add the standard of deferred payment for contracts and debts. Alongside the functions sit the physical qualities anything serving as money needs: general acceptability, durability, portability, divisibility, homogeneity and stability of value.

Statement 4 is worth dwelling on because it states a real principle backwards. Commodity money works only while its monetary value stays above its worth as a commodity — Gresham's law, that bad money drives out good, describes precisely what happens when it does not, since people spend the debased coin and hoard the one whose metal is worth more. Modern fiat currency solves the problem by having almost no alternative use at all: a hundred-rupee note is worth a hundred rupees and nothing else. Any option that asks money to be valuable in some other use has the requirement upside down.

• The primary functions of money are medium of exchange and unit of account; the secondary functions are store of value and standard of deferred payment.
• A medium of exchange removes the need for a double coincidence of wants.
• Good money must be durable, portable, divisible, homogeneous and stable in value.
• Money should have little value in alternative uses, or it leaves circulation.
• Gresham's law — bad money drives out good — describes what follows when the metal is worth more than the coin.

• Reading statement 4 quickly and taking 'value' as a virtue rather than as a defect.
• Dropping divisibility because it sounds like a physical detail rather than an economic function.
• Confusing the functions of money with the components of money supply.

A code-based statement item where one planted statement is the reverse of a real requirement. Find the inversion and the code answers itself.

• practice — not a real PYQ

  The function of money that removes the need for a double coincidence of wants is

  • (a)store of value
  • (b)unit of account
  • (c)medium of exchange
  • (d)standard of deferred payment

  Answer(c) medium of exchange — the function that makes barter unnecessary.

• practice — not a real PYQ

  Gresham's law states that

  • (a)good money drives out bad money
  • (b)bad money drives out good money
  • (c)money supply grows with national income
  • (d)the value of money varies inversely with the price level

  Answer(b) bad money drives out good money — people spend the debased coin and hoard the sound one.