DOES INFLATION,WHICH IS AN INCREASE IN THE PRICE LEVEL, AFFECT THE THREE FUNCTIONS OF MONEY? IF SO,HOW.

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There are three functions of money. One function is to serve as a medium of exchange. Money is exchanged when purchasing goods and services. This function is not impacted by inflation, as money would continue to serve as a medium of exchange if inflation did or didn’t exist.

Money also is a unit of account. Money allows a person to determine the value of goods and services. Money allows people to look at prices to compare products and services. Inflation wouldn’t impact this function of money.

Money functions as a store of value. This function is impacted by inflation. When inflation occurs, the value or purchasing power of money drops. As a result, an individual is able to purchase fewer products with a set amount of money during an inflationary period compared to a noninflationary period.

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The three functions of money in books that I have used in my classes are

  • Medium of exchange
  • Store of value
  • Unit of account

Of these, the only one that is likely to be seriously affected is the second one -- money as a store of value.

If you have saved money, you hope it will be worth at least as much in the future as it is now.  However, if there is inflation, your money loses its value.  If you saved $100 in 1970, the year I was born (and you just kept it under your mattress gathering no interest), it would only be worth $17.21 in today's money, according to my favorite online inflation calculator.

So where there is inflation, your money does not hold its value.

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