How inflation affects the functions of money? Essay
How inflation affects the functions of money?
Inflation alludes to a sustained general rise in the prices of goods and services. In other words, it means a rise in the level of cost of living. Money is anything that is generally acceptable by the society for the exchange of goods and services. There are different functions of money such as: To act as a medium of exchange –Money is used to trade in goods and services both internally and externally. In this way money eases the exchange of goods within and between countries as well.
To act as a store of value –Money enables people to store their wealth in monetary terms. To act as a unit of account a measure of value –Money allows us to measure the value of a commodity and in this way it facilitates comparisons. It allows households and firms to make better choice as regards to their purchase decisions. Finally it acts as a standard of differed payment –Money allows people to make purchases today and to pay at a later date in installments.
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. 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.