Functions of Money in an Economy 

Money is any acceptable and legal tender. It can be also any verifiable record or item that is generally accepted as payment for services and goods, repayment of debts, and taxes in any particular region or country. Money emerged from the market phenomenon that allows for the exchange of goods and services. However, all modern money systems are based on what is known as fiat money that must derive its value by being declared as a legal tender, by a sitting government and be accepted as the form of payment for all private and public debts in the country. Money has four main functions that affect the economy in numerous ways.

Money’s most central role is acting as a medium of exchange to help individuals transact. Without money, all trading transactions would be conducted through barter trade, which is a very limiting and difficult mode of trading (Abhishek & Sushma, 2018). The reason behind this is that barter trade needs double coincidence of wants between the two transacting parties, and the likelihood of this happening is normally very small.

Money is a very good store of value and has to hold its value over an extended period. It has to have the ability to store value and be valuable, as this is what gives it the ability to solve the issue of double coincidence of wants. Money is liquid in nature and this is what makes it acceptable than other forms of assets such as gold, land, and buildings as a form of exchange (Abhishek & Sushma, 2018). Money plays the function unit of account. It provides a common measure of the value of products. By knowing the price of a product, traders are able to make a decision of whether to buy or sell a product and get value for their money.

 Before I took this unit, I only thought that the main function of money was to purchase products. Now I have a wider understanding of the roles money play in society. By being able to store value, money helps stabilize an economy and make it possible for people to buy and sell products in an economy (Abhishek & Sushma, 2018). In addition to this, I have a wider understanding of the concept of storage of value. Even though money can store value, that value can be lost in case hyperinflation leading to many people losing their wealth. For this reason, very rich people opt to store value for their wealth in other assets such as land and gold because as compared to money, these assets are much more stable (Abhishek & Sushma, 2018). In fact, whereas wealth stored in money is bound to lose a fraction of its value, wealth stored in fixed assets such as gold is bound to increase in its value. This means that as much as money plays a very crucial role it would not be the best commodity to store value.

References

Abhishek, B., & Sushma, N. (2018). Maintaining Financial Stability in Times of Risk and

Uncertainty.  New York, NY: IGI Global.