Question

Elaborate on the FOUR (4) main functions of money.

Answer 1

Money can be defined as any object that is generally accepted in an economy or a country as payment for goods and services and repayment of debts .

The main functions of money are as follows :

1) A medium of exchange : Money helps in buying and selling goods and services , Specialization and division of labor is facilitated when is a common medium of exchange . Also a common medium of exchange helps to get rid of the problem of double coincidence of wants . Money has the following properties which makes it best medium of exchange : general acceptability, portability, divisibility, durability, stability of value & homogeneity .

2) A unit of account : Money acts as unit of account since it is a measure of exchange value . Exchange value of every good and service when quoted in a common currency then it becomes easier to compare value of goods to each other . Common measure of value also aids in trade and easy market transactions .

3) A store of value : Money is a repository of purchasing power over time . Money can be saved and spent on a later date due to perfect liquidity and durability . Money when stored creates wealth , so it is a store of value .

4) A standard of deferred payment : In barter system lending and borrowing activities is very difficult . Due to expansion of trade and commerce , lending and borrowing became necessary which was made easy by introduction of money . Deferred payments are those that are paid in future , such as repayment of loans taken today . Money acts as common or generally accepted mode of deferred payments . Loan taken in units of money today is returned in units of money in future which preserves the fairness in transactions .

First 2 are primary functions , last two are secondary function .