As a unit of account, money:

Question

BlackTom AI · Accepted Answer

A unit of account is a common standard for quoting the value of goods and services, so each good’s price can be expressed in a single monetary unit (dollars, euros, etc.). This reduces the complexity of valuing and comparing items.

1. Relevant concepts:
- Unit of account: a standard numerical monetary unit of measurement of the market value of goods, services, and other transactions.
- Barter vs. money: barter requires direct exchange ratios between pairs of goods; money allows every good to have a price in a single unit.

2. Step-by-step reasoning:
- Suppose there are n distinct goods in an economy.
- In pure barter, you need a price (exchange ratio) for every ordered pair or, more commonly, every unordered pair of goods: number of distinct pairwise prices = n(n − 1)/2.
- If money is used as a unit of account, each good needs only one price expressed in money: number of prices = n.
- Compare the two: n(n − 1)/2 versus n. For n > 2, n(n − 1)/2 is much larger than n, so money drastically reduces the number of required prices.

3. Calculation example:
- Let n = 100 goods.
- Barter pairwise prices = 100 × 99 / 2 = 4,950 prices.
- With money as unit of account = 100 prices.
- Reduction from 4,950 to 100 prices.

4. Why the correct answer is correct:
- By providing a single measure for value, money eliminates the need to determine direct exchange rates for every pair of goods, hence it reduces the number of required prices.

5. Why the other options are incorrect:
- b) Increases transaction costs — incorrect; money generally lowers transaction costs relative to barter.  
- c) Doesn’t earn interest — irrelevant to the unit-of-account function; money can be stored in interest-bearing forms.  
- d) Discourages specialization — false; money facilitates trade and thus encourages specialization.

Conclusion: The correct answer is a. reduces the number of required prices, which matches the provided answer.

As a unit of account, money:Single choice

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