Economic Functions of Money, Risk, and Cost

What are the functions of money?   Is there a link between inflation and how well money fulfills each of these functions? Money has three functions. The first is a medium of exchange, an item that buyers give to sellers when they want to purchase goods and services   I like the definition from Wikipedia better, an intermediary used in trade to avoid the inconveniences of a barter system. As a medium of exchange money helps to facilitate the flow of goods and services by eliminating bartering and coincidence of wants (we all want money!). The second is a unit of account, a yardstick people use to post prices and record debts. When we want to measure and record economic value we use money as a unit of account. By assigning everything a dollar value we can have a better idea of what the value of the item might be. It also helps us compare the value of similar items. The third function of money is a store of value, an item the people can use to transfer purchasing power from the present to the future. Money essentially enables us to transport value into the future. There is a link between inflation and how well money fulfills each of these functions. Inflation affects all three functions. In regards to a unit of account, inflation can cause relative prices to vary more than they would otherwise and thereby distort markets. Imagine post World War I Germany and hyperinflation. It would be hard to use the deutch mark as a unit of account because prices were increasing rapidly every day. Inflation forces a good to be priced higher than it would under on inflation. Using the deutch mark would be an ineffective way of gauging the value of item or comparing its value to another. Inflation would affect money as a store of value as well. Once again look to post W.W. I Germany. A deutch mark on Monday would be worth much more than a deutch mark on Friday pressuring people to spend while it still holds value. Inflation deteriorates moneys function as a store of value. Even today,... [continues]

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