(a) What is money? (b) Outline any three characteristics of money. (c) Explain an effect of inflation on each of the functions of money.

Answer Details

(a) Money is a medium of exchange that is widely accepted in transactions for goods and services. It serves as a unit of account, a store of value, and a standard of deferred payment.

(b) Three characteristics of money are:

1. 1. Durability: Money should be able to withstand repeated use and last for a long period of time.
2. 2. Divisibility: Money should be able to be divided into smaller units to allow for transactions of various sizes.
3. 3. Acceptability: Money should be widely accepted as a means of payment in transactions for goods and services.

(c) Inflation is an increase in the general price level of goods and services in an economy over a period of time. Inflation affects the functions of money in the following ways:

1. 1. Unit of Account: Inflation makes it difficult to compare prices and the value of money over time, as the purchasing power of money changes.
2. 2. Store of Value: Inflation erodes the value of money over time, so if an individual saves money, the purchasing power of that money will decrease.
3. 3. Medium of Exchange: Inflation can lead to a decrease in the acceptability of money as a medium of exchange, as people may prefer to hold onto other assets that are less affected by inflation.