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Social Science: Money and Credit: Role of Money in an Economy - Role of Money in an Economy

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ConceptRole of Money in an Economy

Question

Why is modern currency accepted as a medium of exchange without any use of its own? Find out the reason.

Solution

Due to development of an economy, there is an added increase in the number of economic transactions. Thus there is greater demand for money as a common medium of exchange. Metallic money from former times was replaced by paper money. The modern forms of money include currency - paper notes and coins. Modern currency is not made of precious metals such as gold, silver etc. and is as such without any use of its own. It is accepted as a medium of exchange because the currency is authorised by the government of a country. In India, the currency department of the Reserve Bank of India attends to the core statutory function of issuing paper money of definite denominations and value. The law legalises the use of this money as a medium of payment which cannot be refused in settling transactions in India. No one in India can refuse to accept this money. Therefore, money is widely accepted as a medium of exchange.

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Solution Concept: Role of Money in an Economy.
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