Question

Suppose the value of the dollar declines relative to other currencies. How does the decline affect the three functions of money?

a) Increases
b) Decreases
c) Remains unchanged
d) No impact

Answer 1

When the value of the dollar declines, it can affect the three functions of money: medium of exchange, unit of account, and store of value.

Step-by-step explanation:

When the value of the dollar declines relative to other currencies, it affects the three functions of money as follows:

1. Medium of Exchange: The decline in the value of the dollar can lead to an increase in prices of imported goods and services, as it becomes more expensive to purchase them with dollars. This can reduce the purchasing power of the dollar, making it less effective as a medium of exchange.
2. Unit of Account: The decline in the value of the dollar can also make it more difficult to measure and compare the value of goods and services. For example, if the dollar depreciates compared to the euro, the prices of goods and services in euros would appear higher when converted into dollars.
3. Store of Value: A decline in the value of the dollar can also decrease its function as a store of value. People may choose to hold assets or invest in other currencies that maintain their value better than the declining dollar.