Final answer:
Currencies are a medium of exchange that have evolved from physical commodity forms to digital transactions, with special characteristics such as appreciating or depreciating value, the choice to dollarize, and the floating exchange rate. They also facilitate economic activities like arbitrage and FDI, and come in general-purpose or special-purpose forms.
Step-by-step explanation:
Currencies have evolved from the use of commodity and commodity-backed paper money to fiat currency. As the global economy develops and technology advances, the physical forms of money are being supplemented or even replaced by digital transactions, such as those using debit and credit cards. Currency has several special characteristics that adapt to the changing economic environment.
For instance, some currencies may experience appreciating, where the currency gains value against other currencies, often due to economic growth or lower inflation rates. Conversely, depreciating occurs when a currency loses value, which can happen due to higher inflation or economic instability. Specific countries might choose to dollarize, adopting the U.S. dollar as their official currency to achieve stability or facilitate trade.
Regarding currency management, we have systems like floating exchange rate, where the market determines a currency's value in contrast to a fixed exchange rate governed by a country's central bank. In terms of international economics, currencies play a crucial role in activities like arbitrage and foreign direct investment (FDI), with the latter involving substantial ownership in a foreign firm or enterprise. Finally, it's important to differentiate between general-purpose money, which is widely accepted for various transactions, and special-purpose money, which is more narrowly used for certain types of transactions or societal functions.