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Question

Difficulty: MediumFunctions and Characteristics of Money

During periods of rapid inflation, individuals tend to spend money immediately rather than holding onto cash savings because purchasing power declines over time. Which function of money is directly impaired in this situation while its role in facilitating daily trade continues?

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

Answer

Store of value
The store of value function allows money to retain purchasing power over time so wealth can be saved for future consumption. During inflation, rising prices decrease what a fixed sum of money can buy, directly damaging this specific function.

Step-by-Step Solution

1
Identify the core effect described in the scenario
Money loses purchasing power over time due to rapid inflation, making holding cash unprofitable.
Inflation erodes the real value of money held over any time interval.
2
Map the effect to the primary and secondary functions of money
The ability to preserve purchasing power across time corresponds directly to the store of value function.
Money serves as a store of value when it enables individuals to transfer purchasing power from the present into the future.

Key Concept

Functions of Money under Inflationary Pressure
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Topics

Functions and Characteristics of Money

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