Theory question 110
Money and Inflation(a) Explain the function of money as a (i) measure of value; (ii) store of value.
(b) Show how inflation affects these two functions of money.
Show the model answer
(a)(i) Measure of value (unit of account): money is used to express the value of all goods and services as prices, making comparison and accounting easy.
(ii) Store of value: money can be kept and used later to buy goods, since it does not perish.
(b) Measure of value: rising prices change the value of money constantly, so it no longer measures value accurately; prices must be revised often and comparisons over time become difficult.
Store of value: money loses purchasing power over time, so people prefer to hold real assets (land, buildings, goods) rather than money; savings lose value.
Inflation weakens both functions because the value of money keeps falling.