Question

What are the types and functions of money?

Answer 1

Money is the generally accepted medium of exchange for goods and services.The four most important kinds of money are commodity money,Fiat money, Fiduciary money and commercial bank money.Commodity money is the oldest type of money where goods an services are directly exchanged for goods and services.It is known as barter system.Egs are gold coins ,beads etc.Fiat money is considered as legal tender by the order of the government and everyone within the country accepts it as money. Egs are coins.Fiduciary money are not declared legal tender by the government but they are accepted as medium of payment. Egs are cheques , drafts etc.Commercial bank money may be considered as debt generated by commercial banks.It is used as real money to purchase goods and services.

The six important functions of money are-Medium of exchange, measure of value, unit of account , store of value. basis of credit,Standard of deferred payment.The use of money as a medium of exchange helps to overcome the drawbacks of barter.Consumer has different types of wants and with money he can buy whatever he wants unlike barter system where he has to depend on another person to provide what he wants.Measure of value-one of the drawbacks of barter was to measure the value of goods . Money can be used to measure the value of goods and services and pay the price for it.Money allows everything to be priced.People can compare the different prices and ascertain the value.Store of value- under barter goods cannot be stored as they will perish but money can be saved and stored. Thus money is a store of purchasing power.Basis of credit -money is given as loan which can be used by people to purchase goods when they are in urgent need of it.Unit of account- money is used to. calculate Gross National product in the economy.All goods and services produced in the economy are measured in terms of money to calculate the GDP.Standard of deferred payment-- Money can be used to postpone payment. Goods and services can be purchased and payment can be made in instalments spreading over a span of time.