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  3. What are the three major functions of money? Describe how drastic inflation can

What are the three major functions of money? Describe how drastic inflation can

游客2025-06-21  15
问题 What are the three major functions of money? Describe how drastic inflation can undermine the ability of money to perform these three basic functions.
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答案 Money acts as (1) a medium of exchange—enabling the purchase of goods and services, (2) a store of wealth—the ability to delay purchase yet maintain wealth, and (3) a unit of account—the assignment of a monetary value to goods and services permitting a comparison of relative value, both currently and over time.
Drastic inflation refers to a period of rapid escalation in prices, meaning the purchasing power of money plummets. We may observe sellers unwilling to accept money and using it, they find its purchasing power significantly eroded. Then money is not acting as a medium of exchange. When its purchasing power is declining, money is obviously not a good store of wealth. Also in such periods, borrowers benefit at the expense of savers, as they repay dollars that have lower purchasing power than the dollars they initially borrowed, and we may find some prices escalate more rapidly than others. Then money is not functioning as a good unit of account.
If rampant inflation does occur, money ceases to perform its functions well and individuals may mm to barter as a means of organizing the exchange of goods and services. This is an inefficient outcome for the economy.
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