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Question

Difficulty: MediumMeaning, Functions, and Characteristics of Money

During a hyperinflationary period, traders in an economy prefer holding physical assets and commodities rather than cash reserves because money rapidly loses its purchasing power over time. Which function of money is primarily impaired in this scenario?

  1. Store of valueAnswer
  2. B
    Medium of exchange
  3. C
    Unit of account
  4. D
    Standard of deferred payment

Answer

Store of value is the primary function impaired because money loses purchasing power during severe inflation.
The function of money as a store of value allows individuals to accumulate wealth and hold purchasing power for future consumption. Severe inflation diminishes the purchasing power of money, rendering it ineffective as a reservoir of value.

Step-by-Step Solution

1
Identify the economic condition described in the stem.
The scenario describes hyperinflation where money loses purchasing power rapidly over time.
Inflation directly diminishes the real value of money held across time periods.
2
Relate the condition to money's functions.
Money acts as a store of value when it allows individuals to save purchasing power for future use.
When money loses purchasing power rapidly, holding it fails to preserve wealth, thereby impairing its role as a store of value.

Key Concept

Secondary Functions of Money: Store of Value
Estimated Time:1m 0s
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Topics

Meaning, Functions, and Characteristics of Money

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