The Role of Money

Question 1

explain the use of money: means of deferred payments

Answer 1

• money can be used to make payments in the future
• for this to be useful, prices need to remain fairly stable
• significant changes in the levels of prices eg. high levels of inflation, means that this use of money becomes limited

Question 2

explain the use of money: a store of value

Answer 2

• money acts as a store of value overtime
• enables individuals to transfer spending to future time periods secure in the knowledge that it will have a future value
• this allows us to purchase products in the future, rather than having to buy it today
• it can be kept until it is required to buy goods and services
• it is readily accepted by all economic agents

Question 3

explain the use of money: unit of account

Answer 3

• provides a measure by which we can value goods and services
• it is divisible into different units
• every unit of value is the same
• allows buyers and sellers to determine the value of goods and services

Question 4

explain the use of money: medium of exchange

Answer 4

• enables goods and services to be exchanged, transactions to be settled and debts to be paid
• money avoids the problems of barter
• barter is insufficient and would suppress specialisation and the division of labour