Money Money MO~~~NEY!!!

There are four requirements to, what is consdered as money.

• Medium of exchange- In the olden days, the 'barter' system was used where people would trade their goods for others. For example, guy A wishes to 'buy' guy B's box of apples, in return guy A would give guy B his precious fighting rooster as there was no medium to exchange these G&S. This is where money comes in, as it acts as a medium that is acceptable as a means of payment for G&S. This solves the problem of losing your precious fighting rooster!

My~~~ pre~cious chicken~~!!!!!!!!!!!!!!

• Unit of account- During those days, it was tough to determine the values of G&S. However, money is able to establish this value. Example, a box of apples would cost $5 where a rooster would cost $10. This might cause problems to those who still follow the barter system...

Time has changed. Give me two boxes of apples.

• A store value- Unlike the rooster that can die of diseases or apples that can rot, money can be stored easily and maintain it's value for many years. Because of this, it is very convenient to those filthy rich people as they don't need anchors of farms to store their wealth.

• A standard of deferred payment- With money, you will be able to pay for you G&S on credit, (payment made after receiving the G&S). If barter system were still around, it would be a big risk for those who receive their G&S later on as the goods returned may have lost it's value.

Inflation

Inflation is where there is an increase in the prices of most G&S, and this will affect the four requirements of money.

Medium of exchange- Though the possibilities of inflation having an impact on medium of exchange is low, it is still possible(only when the country is undergoing hyperinflation). This may cause the people to adopt other countries currency and abandon their own countries currency.

Unit of account- The value of G&S would increase over time, due to it's improvement in quality. However, when inflation kicks in, it would be difficult to determine the original price of the G&S and how much of the increase in price was due to inflation or the quality of the G&S.

Store value- People would be discourage to make savings as the value or the people's buying power decreases, if inflation rate is higher than the savings rate. For example, John saves $100 which could have been used to buy a house, but because of inflation, that $100 cannot even be used to stay at a hotel for a night.

If savings were to fall, the bank may need to increase their interest rates, but this would than discourage firms to borrow money from the bank as they would now need to pay back more.

Standard of deferred payment- Inflation may cause the value of the money that is to be given at the end of the credit period to decrease. This would discourage people to make credit payments. However, most firms has handled this problem by including a clause in the loan contracts if an inflation were to occur, such as creditors to charge higher prices.

In my opinion, money is able to solve many problems that were faced during the past such as uncertainty of values of G&S, bringing your cows across town and the worry of your credit G&S to have lose it's value by the time it comes into hand. However, people will need to be aware of the risks of inflation to money and adept to the effects of inflation, like most firms has with their special clauses in loan contracts.

In conclusion, money, with it's four main functions, is an important factor in our daily life.

Special note, pictures were taken from Google Images and I do NOT own any of it. Big thanks to Google. :D