- Money acts as a medium of exchange because it facilitates transactions.
- Individuals can sell their produce for money and use money to buy other goods.
- Money acts as a convenient unit of account.
- The value of all goods and services can be expressed in monetary units (e.g., Rs. 300 for a book).
- This allows for easy comparison and calculation of value.
Diagram: Dynamics of Money Supply and Prices
- Constant Money Supply: Price changes depend on output variations
- Decreased Money Supply: Can cause price decreases if output is constant or increasing
- Increased Money Supply: Leads to potential price increases if output is constant or decreasing