define money . explain the various function of money . can bank or paper money in isolation perform all these function satisfactorily? for bcom hons semester 3
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Answer:
Money is a commodity accepted by general consent as a medium of economic exchange. It is the medium in which prices and values are expressed. It circulates from person to person and country to country, facilitating trade, and it is the principal measure of wealth.
function of money
As described in the previous concept, the first and the leading role of money is to function as a mode of exchange. Barter exchanges become exceptionally tough in a large economy because of the high prices, people would have to sustain looking for proper people to exchange their excesses or surpluses.
Money also functions as a suitable unit of account. The value of all the commodities and services can be expressed in monetary terms. If the cost prices of all goods go up in monetary terms, i.e., there is a general rise in the cost price degree, the value of money in terms of any good must have come down – in the sense that a unit of money can now buy less of any good. We call it a decline or deterioration in the buying power of money.
The barter system has other dearths and deficiencies. It is tough to carry forward one’s opulence under the barter system. Assume you have an establishment of rice that you do not wish to utilise entirely. You may consider this stock of excess rice as follows:
An asset that you may want to utilise or sell-off, for obtaining other goods on some future date.
However, rice is a biodegradable item and cannot be stockpiled afar a definite time frame.
Holding the stockpiled rice requires a lot of space. You may have to spend a substantial amount of time and resources looking for people with a demand for rice when you wish to interchange your stockpile for purchasing other goods.
This issue can be resolved if the rice is sold for money. Money is perpetual and its stockpiling prices are also noticeably less. Hence, money can function as a stock of value for individuals.
Wealth can be stockpiled in the form of money for future utilisation. However, to perform this well, the value of money must be adequately constant and firm.
An increasing cost price degree may abrade the buying capacity of mone