(a) Explain the function of money as a (i) measure of value [5 marks] (ii) store of value. [5 marks] (b)Show how inflation affects these two functions of mo...

Answer Details

(a) Two functions of money.

• (i) Measure of value (unit of account). Money serves as a common denominator in which the value or price of every good and service is expressed. Because all prices are quoted in the same money unit, buyers and sellers can compare the values of different goods easily and keep accounts.
• (ii) Store of value. Money can be saved and held now and used to buy goods and services in the future. It allows people to keep their wealth in a convenient, liquid form and to separate the act of selling from the act of buying over time.

(b) How inflation affects these two functions. Inflation is a persistent rise in the general price level, which means a fall in the purchasing power of money.

• On money as a measure of value: when prices keep rising, the money unit no longer measures value consistently, one naira buys less this month than last month. Money becomes an unreliable, shifting measuring rod, so it becomes hard to compare values over time and to plan or keep meaningful accounts.
• On money as a store of value: inflation erodes purchasing power, so money saved today loses value by the time it is spent. Holding wealth in money brings a real loss, which discourages saving in money form and pushes people to hold goods, property or foreign currency instead.

Examination takeaway: the single idea linking both effects is that inflation reduces the purchasing power of money; explain how that instability spoils money both as a yardstick of value and as a way of storing value.