Question

What are the functions of Money? and explain it.

Answer 1

Functions of money are classified into Primary or Main function, Secondary function, and Contingent function.

• Primary or main functions:
  The important functions of money performed in the very economy are classified under main functions:

1. Medium of exchange or means of payment – Money is used to buy goods and services.
2. Measure of value – All the values are expressed in terms of money it is easier to determine the rate of exchange between various types of goods and services.

• Secondary functions:
  The three important of secondary functions are

1. Standard of deferred payment – Money helps the future payments too. A borrower borrowing today places himself under an obligation to pay a specified sum of money on some specified future date.
2. Store of value or store of purchasing power – Savings were discouraged under the barter system as some commodities are perishable. The introduction of money has helped to save it for the future as it is not perishable.
3. Transfer of value or transfer of purchasing power – Money makes the exchange of goods to distant places as well as abroad possible. It was therefore felt necessary to transfer purchasing power from one place to another.

• Contingent functions:

1. Basis of credit
2. Increase the productivity of capital
3. Measurement and Distribution of National Income.