Money plays a significant role in the economy. The purposes of money include as medium of exchange where money is used in exchange for goods and services. Money is also used as measures of value where it acts as a common denominator permitting every good or service to be priced and compare relative good prices. As measure of value, households can plan expenditure and business can maintain records of income and costs to determine profit and loss. Money also acts as a store of value because it does not deteriorate or lose value when stored allowing for future purchases. Money also acts as a basis of credit allowed individuals to borrow money and repay in installments or at a later date. The other functions of money are unit of account for accounting purposes and standard of postponed payment in hire purchase transactions.
Inflation defines occurs when “the general price level and costs is rising” (Currie 6-20). Inflation causes increases in the prices of commodities such as gasoline, bread, and cars. Inflation hurts households more in an economy because of the limited ability to purchase items required daily. However, the poor are the most affected by inflation since the prices for basic commodities increase considerably especially food items and business can easily increase prices without having to increase minimum wage that takes time to be effected further compounding the problem. Savers gain from inflation owing to repayments with money that has lost value. Businesses can also gain from inflation by passing on higher prices to consumers and maintaining the high prices even after inflation is reduced or eliminated gaining abnormal profits.
The gold exchange standard refers to a monetary system where the value of a country’s currency is kept at parity with another currency based on the gold standard. Therefore, the economic unit of accounting in the economy bases on a fixed quantity of gold. The disadvantages of using gold instead of paper are complexity of the system where the public do not easily comprehend the workings, requires frequent government intervention to work, there is low public confidence, expensive, limits independence of monetary authority in a country, and reducing money supply is difficult hence causes high inflation in an economy. Another disadvantage of using gold is that external stability takes huger precedence at the expense of internal stability for the countries.
Hyperinflation is different from inflation because the rise in the prices of goods is so high and usually accelerating such that the value of the currency loses value within a very short time. Inflation is gradual ad takes time hence hyperinflation characterizes unstable economies. An example of hyperinflation is the drop in value of the Confederate Dollar that was at par with the US Dollar to 1,200: 1 and eventually fell out of use entirely.
Interest rates help in the allocation of money on the economy. The interest acts as a price for money allowing investors to lend money of interest if high and reduce lending when interest is low. Interest acts as a basis to determine is money will be consumed or used for investment in construction and other purposes. Interest rates send signals to investors on the performance of their investments and signal either the need for increased or reduced investment. A fall in the interest rates signals to investors the reduced cost of borrowing call for more investment and a rise in interest shows increases cost of borrowing signaling high costs of borrowing hence lower investment.
Work cited
Currie. Macroeconomic Analysis. Nirali Prakashan, 2015
Works Cited
