- Money plays three important roles/functions.
Medium of Exchange
- This is the most important role of money.
- It facilitates exchanges and transactions.
- Example: A farmer sells rice for money, then uses money to buy wheat.
Unit of Account
- Money acts as a convenient unit of account.
- The value of all goods and services can be expressed in monetary units.
- Example: A book is valued at Rs. 300, meaning it can be exchanged for 300 units of money.
Store of Value
- Wealth can be stored in the form of money for future use.
- Money is not perishable and has low storage costs.
- It is acceptable to everyone at any point in time.
- Example: Saving money to buy something later.
- If prices rise steeply, money’s purchasing power erodes, compromising this function.