2.What are the functions of money? And Explain it.
Answers
Functions of money Functions of money can be broadly categorised into the following two types:
(a) Primary functions
(b) Secondary functions
(a) Primary functions i) Medium of exchange:
● It means that money can be used to make payments for all the transactions of goods and services.
● A buyer can buy goods through money, and a seller can sell goods for money.
● It is an essential function of money.
ii) Measure of value:
● Money serves as a measure of value.
● The value of all goods and services is expressed in terms of money.
(b) Secondary functions
i) Standard of deferred payments:
● It means that money acts as a ‘standard’ for making future payments.
● It has made deferred payments much easier than before.
● Example: When we borrow money from somebody, we have to return both the principal as well as the interest amount in the future.
● Money is a convenient mode of calculation and payment of interest amount to be paid in the future.
● This function has facilitated borrowing and lending.
● It has also led to the creation of financial institutions.
ii) Store of value:
● A store of value implies a store of wealth.
● Money can be easily stored for future use.
● It is the most convenient and economical means to store earnings and wealth.
iii) Transfer of value:
● Money also serves for transfer of value.
● It facilitates buying and selling of goods not only in the domestic country but also in other parts of the world.