expaln the types of money in brief
Answers
Explanation:
The four most relevant types of money are commodity money, fiat money, fiduciary money, and commercial bank money. Commodity money relies on intrinsically valuable commodities that act as a medium of exchange.
Answer:
In economics, money is simply something generally accepted as a medium of exchange for goods and services (Merriam-Webster). That means that anything can technically be considered money, but the most accepted kind today comes in the form of paper, coins (metallic money), and credits (backed by banks).
There are 5 different types of money: Fiat, commodity, representative, fiduciary, and commercial bank money. They also all have three functions in common; they serve as a medium of exchange, as a store of value, and as a unit of account.
A Medium of Exchange
The main and most important function of money is that it can be used in the exchange of goods and services. As a widely accepted form of payment, it serves as a medium of exchange that allows those who use it to get what they need easily.
Unit of account
Serving as a unit of account, money acts as a common standard for measuring the value of goods and services. It’s consistent and allows you to easily compare the worth of a $1 soda to a $50 chair. On the other hand, if I had to pay for the soda with pencils, and the chair with apples, it’d be harder to understand their values.
Store of value
Money must also serve as a store of value, meaning that it retains its worth over time. It should be able to be saved, stored, and retrieved while still being viable as a reliable medium of exchange. If I sold a bunch of chairs for apples, I would not be able to “Stack My Apples” and continue increasing my wealth. Over time, they would be worth LESS when they’re getting soft, and WORTHLESS when spoiled.
Fiat Money
Examples: Banknotes (paper money) and coins
Fiat money (fiat currency) is money whose value is not based on its inherent value but is based on an authoritative decision (fiat) by the governing body. The government declares it as legal tender and it must then be accepted as a form of payment everywhere. Due to not having an intrinsic value, a partially destroyed bill can be replaced by the Federal Reserve Bank. On the other hand, commodity money can not be.
Commodity Money
Examples: Precious metals (i.e. gold), salt, beads, alcohol
Unlike fiat currency, the value of commodity money is intrinsic; its value comes from the commodity it is made from. If the money is destroyed, it cannot be replaced. It is also probably the earliest form of money. These commodities are used as a medium of exchange and gain their value from the scarcity of the items. The use of this type of money is like using the barter system where goods and services are exchanged for the like. Unlike the barter system, using commodity money functions as a unit of account that allows you to compare the worth of goods and services.
Representative Money
Examples: Certificates, paper money, token coins
Representative money, like fiat money, has no value of its own. Unlike fiat money, it is backed by a commodity. As a commodity-back money, it could be exchanged for precious metals (like gold) held within a bank vault. It was easier to carry a certificate around rather than a chest full of gold.
Fiduciary Money
Examples: Checks, bank drafts
Deriving from the Latin word fiducia, to trust, fiduciary money works on the promise and trust that it will be exchanged for fiat or commodity money by the issuer (bank). People are not required to take it as a form of payment because it is not a government-ordered legal tender.
Commercial Bank Money
Example: Funds in a checking account
Commercial money (also known as demand deposits) is a claim against a bank for the purchase of goods and services (through the means of withdrawing in person, check, ATMs, or online banking). It is a debt-created currency by the bank. They create more money through a process called fractional-reserve banking. In this, only a certain percentage of money the bank “has” is held within it. The other percent is given to others in the form of loans, in doing so, the bank makes back more money from the interest and fees charged to customers.
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