Inflation is the increase in the general price level over a period of time. An inflation rate of 10% means that the average price level rises by 10%. Inflation means that the value of money decreases. If goods are more expensive a £10 note will buy less over time. Money is something that is generally acceptable in the exchange of goods and services.
The most commonly distinguished functions of money are as a medium of exchange, a unit of account, a store of value, and, sometimes, a standard of deferred payment.
1. Medium of Exchange - used for buying and selling goods.
2. Store of Value: We value goods and wealth through money. Money makes it easy to compare goods
3. Standard of Deferred Payment: Money is used to pay back debt.
4. Unit of Account: prices and accounting records use money
Medium of exchange: As long as the same money is going to be accepted as payment, inflation will not affect this function. But in extreme cases of inflation, people may lose confidence in money to the extent that they don't trust it, and resort to barter or some other means of conducting transactions.
Unit of account: This means that money is a unit for measuring the relative values of different things. Inflation affects this function in two ways: different prices change by different amounts during inflation, making comparisons difficult, and unstable prices makes it difficult for people to have perfect information for comparisons.
Store of value: This is the one that inflation obviously affects the most. Inflation erodes the value of money; it does not keep its value. Something that costs a certain amount today will cost more tomorrow. This affects everything from the timing of transactions to the amount required for future payments (interest rates).
one of the four functions of money is to serve as a "standard of deferred payment". It means that a contract or...
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