Question

What are the important functions of money? Write with examples.

Hint:

Money facilitates trade, stores value, acts as a unit of account, and allows for future payments, all of which are crucial for the smooth functioning of an economy.

Answer 1

Money plays a vital role in an economy by facilitating trade, storing value, and acting as a unit of account. The functions of money can be understood as follows:

Step 1: Medium of Exchange.
The most basic function of money is to act as a medium of exchange, which eliminates the need for barter. Money allows goods and services to be exchanged more efficiently, as it is universally accepted. For example, instead of exchanging apples for oranges, money allows consumers to purchase both items with the same medium.

Step 2: Store of Value.
Money serves as a store of value, meaning it can be saved and used for future transactions. Unlike perishable goods, money retains its value over time, allowing individuals to store wealth and use it when needed. For example, you can save money today and spend it months or years later without it losing its purchasing power.

Step 3: Unit of Account.
Money acts as a unit of account, which provides a standard measure for the value of goods and services. This function allows individuals and businesses to compare the relative value of different goods and services. For example, when a product is priced at $10, consumers can easily understand its value in terms of money and compare it with other products.

Step 4: Standard of Deferred Payments.
Money is also a standard of deferred payments, which means it is used to settle debts that are due in the future. This function enables individuals and businesses to borrow and lend money. For example, if a borrower takes a loan of $100, they can repay the amount in the future, using money as the means of payment.

Step 5: Conclusion.
Money’s primary functions—medium of exchange, store of value, unit of account, and standard of deferred payments—are fundamental to the functioning of an economy. Without these functions, trade would be less efficient, and the economy would be less developed.