MONEY BANKING Chapter 2 MONEY AND ITS FUNCTIONS

MONEY & BANKING Chapter # 2

MONEY AND ITS FUNCTIONS

Money and its functions Money is anything that is generally acceptable in payment for goods and services or in the repayment of debts. It is also defined as anything that is regularly used in economic transactions of exchanges.

FUNCTIONS OF MONEY 1. MONEY AS A MEDIUM OF EXCHANGE In all transactions money is used to for goods and services. Sale or purchase of goods is done through money. Money has made the exchange of goods easy. The time spent in exchange of goods with the use of money has been considerably reduced.

2. MONEY AS UNIT OF ACCOUNT Another important role of money is that it serves as a common measure of value. The value of goods and services can be expressed in terms of units of money. Money is the yardstick that allows the individuals to measure the relative value of goods and services. For example, a car may be listed for sale at $10000, a house for $20000 etc.

3. MONEY AS A STANDARD OF DEFERRED PAYMENTS In the modern world, business is mostly conducted on the basis of credit. Money is the only unit of account which is easy to borrow and easy to lend. The function of money as standard of deferred payments is better served if the value of money more or less remains stable.

4. Money as a store of value Money also functions as a store of value. It represents purchasing power overtime. Since money is the most liquid of all assets, therefore it is easier to store value in the form of money. In the barter economy when goods were used as money there were problems in storing wealth in the form of cattle, grains etc. Money has removed this difficulty to store wealth.

QUALITIES OF GOOD MONEY General Acceptability: Stability of Value: Transportability: Storability: Divisibility: Malleability: