Question

What are the main functions of money?

Answer 1

The main functions of money are as follows:

1. Medium of exchange: Money acts as a medium of exchange, as it facilitates exchange through a common medium, i.e., currency. In other words, money helps in the buying and selling of goods. For example, a person can sell his goods to another for money, and that person can use money to purchase goods of his choice. Money solves the problem of double coincidence of wants.
2. Unit of value: The values of goods can be measured in terms of money. It is a common medium through which we can calculate the value of each and every good. The value of a good in terms of money is called the price. In a barter system the lack of a common denominator for measuring values of goods was a major drawback.
3. Store of value: This function explains the importance of money as value storage. This implies that wealth in the form of money can be stored easily as a medium of exchange for future use. For example, money can be stored in banks for meeting emergency and future needs.
4. Standard of deferred payments: Payments can easily be made through the medium of money. In other words, it is very difficult to pay back a loan in terms of goods and services. However, with the advent of money, the payments of loans or interest can easily be made.