How inflation affects the functions of money?

Inflation mentions a continual basic increase in the prices of products and services. Simply put, it indicates an increase in the level of cost of living. Cash is anything that is generally appropriate by the society for the exchange of goods and services. There are various functions of money such as: To function as a legal tender-- Money is used to trade in items and services both internally and externally. In this method cash relieves the exchange of products within and between countries also.

To serve as a store of worth-- Cash enables individuals to keep their wealth in financial terms. To serve as a system of account a step of value-- Cash permits us to determine the worth of a commodity and in this way it assists in contrasts. It permits families and firms to make better choice as concerns to their purchase choices. Lastly it serves as a standard of differed payment-- Money allows individuals to make purchases today and to pay at a later date in installations.

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Thus this function of money encourages consumptions by households. Inflation adversely affects the function of money. With higher prices, money loses its value thus it can no longer act as a medium of exchange. The transactionary demand for money falls. With inflation people starts losing confidence on the value of money, thus, money can no longer act as a means for deferred payment that is we cannot postpone payment as there will be less credit facilities available on the market. The store of value function is equally threatened by inflation.

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As the real value of money falls, wealthy holders are induced to switch to real assets, such as houses, cars and other consumer durables. Given that with inflation, there are market uncertainties and price fluctuation, it becomes difficult for money to be a unit of account.

Updated: Jul 06, 2022
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How inflation affects the functions of money?. (2016, Apr 18). Retrieved from

How inflation affects the functions of money? essay
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