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Difficulty: Very hardMeaning, Functions, and Characteristics of Money

A merchant in Aba agrees to supply 100 cartons of textiles to a retailer on credit, with a contractual agreement specifying a fixed settlement of ₦5,000,000 payable in six months. By the time the debt matures, persistent macroeconomic inflation has severely eroded the real purchasing power of the currency. Which function of money is demonstrated by the initial credit agreement, and which characteristic of money is directly undermined by the subsequent inflation?

  1. Function: Standard of deferred payment; Characteristic: Stability of valueAnswer
  2. B
    Function: Store of value; Characteristic: Durability
  3. C
    Function: Medium of exchange; Characteristic: General acceptability
  4. D
    Function: Unit of account; Characteristic: Divisibility

Answer

The correct option states that the function demonstrated is the standard of deferred payment, and the characteristic undermined is the stability of value.
Money facilitates credit transactions by acting as a standard of deferred payment, allowing debts contracted today to be settled in monetary terms in the future. When general price inflation occurs over the credit period, the currency buys fewer goods and services than at the start of the contract, directly demonstrating a breakdown in money's stability of value.

Step-by-Step Solution

1
Analyze the nature of the transaction described in the stem.
The agreement allows goods to be supplied now while postponing monetary settlement to a future date (six months later).
Postponed settlement of debt is the core definition of money serving as a standard of deferred payment.
2
Evaluate the effect of macroeconomic inflation on the money used in the contract.
Inflation reduces what the fixed sum of ₦5,000,000 can buy upon maturity.
When price levels rise, the real purchasing power of money falls, which directly compromises its stability of value characteristic.
3
Synthesize the function and characteristic to identify the matching option.
The combination of standard of deferred payment (function) and stability of value (characteristic) uniquely addresses both parts of the question.
Other options misclassify the deferred payment function as store of value, unit of account, or medium of exchange, and confuse economic stability of value with physical attributes like durability or divisibility.

Key Concept

Functions and Characteristics of Money
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Topics

Meaning, Functions, and Characteristics of Money

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