(a) What is money?
(b) Outline any three characteristics of money.
(c) Explain an effect of inflation on each of the functions of money.
Explanation
(a) Money is any commodity which is generally acceptable in payment for goods and services and for the settlement of debts.
(b)(i) Portability: - money should be easily carried from one place to the other
(ii) Homogeneity:- money must be the same size, weight and colour.
(iii) Acceptability:- money must be generally acceptable.
(iv) Recognisability/cognisability:- money should be easily recognised by the people.
(v) Relatively scarce:- Money should be relatively scarce i.e. it must be limited in supply.
(vi) Durability:- the material used as money must be able to last long.
(vii) Stability:- the value of money must be relatively stable over a period of time.
(viii) Intrinsic value:- the material used as money must not have value higher than the face value of money.
(ix) Divisibility:- money must be capable of being divided into smaller units.
(c)(i) As a measure of value/unit of account:- During inflation, prices rise rapidly so money loses value. Therefore money ceases to be a good measure of value as its value becomes unstable.
(ii) As a standard for deferred payments: - Goods sold on credit are paid for in future with money. During inflation, this function is affected as money loses value with time. Credit sales are discouraged.
(iii) As a store of value: - During inflation, money stored or kept now will lose value in future. So people prefer to store their wealth in other forms.
(iv) As a medium of exchange:- During inflation, money loses its value. People lose confidence in money and may prefer other commodities as medium of exchange.