How inflation affects function of money essay
Primary functions of money
Unit of Account: prices and accounting records use money Inflation means an increase in the general price level. Money is anything that is generally acceptable by the society for the exchange of goods and services. The purchasing power of money decreases. The transactionary demand for money falls. Therefore, in periods of high inflation, banks will be less willing to lend money because they will lose out if people pay back the debt in the future when money is worth less. This is the one that inflation obviously affects the most. The store of value function is equally threatened by inflation. Given that with inflation, there are market uncertainties and price fluctuation, it becomes difficult for money to be a unit of account. Central Intelligence Agency. Medium of exchange means that any item that is widely acceptable in exchange of goods and services. If the rate of inflation is stable it is easier to make these calculations. Inflation however affects many thing one being function of money such as medium of exchange, store of value, unit of account and standard of deferred payments. The shop of value map is every bit threatened by rising prices. Store of Value: We value goods and wealth through money. Firstly, there is demand-pull inflation; this is basically when the total aggregate demand in an economy goes up, resulting in a rise in the general price level.
When the general price level rises, each unit of currency buys fewer goods and services, and consequently, results in, a reduction in the purchasing power per unit of money. Inflation and the Function of Money Readers Qu.
In this situation, money does not function as an effective store of value. With inflation people starts losing confidence on the value of money, thus, money can no longer act as a means for deferred payment that is we cannot postpone payment as there will be less credit facilities available on the market.
People will not save their money to invest further.
Functions of money
Store of value: The ability of a currency, commodity, or other type of capital to retain its worth over time. Related Papers. But in extreme cases of inflation, people may lose confidence in money to the extent that they don't trust it, and resort to barter or some other means of conducting transactions. As long as the same money is going to be accepted as payment, inflation will not affect this function. Medium of exchange means that any item that is widely acceptable in exchange of goods and services. Get Essay The existence of a medium allows trade to take place without the need for a joint coincidence of wants. Businesses in need of cash to buy equipments to start up, to expand and to overcome cash flow problems can not get enough finance so they will produce less output and salary to workers. Money can no longer be a standard for deferred payment. Imagine an accountant who needs her car fixed. Inflation erodes the value of money; it does not keep its value. Unit of account: A common measurement used to compare the value of goods and services. Double coincidence of wants: Each participant in an exchange is willing to trade what he or she has in exchange for what the other participant is willing to trade. Inflation alludes to a sustained general rise in the prices of goods and services. Inflation is defined as a persistent increase in general price level. Using money allows a more efficient outcome because it cuts down on search costs, and it allows workers to specialize in what they do best.
If asset prices are stable, money is unattractive as a store of value, as it brings in no income, but if asset prices are unstable it may be worth holding some part of total assets in money, as a safeguard This 10 percent interest adjustment of the deferred payment is also dependent on inflation.
To act as a store of value —Money enables people to store their wealth in monetary terms.
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