Question

State with reasons whether you agree or disagree with the following statements.

Money performs various functions.

Answer 1

Yes. we agree. Money performs a variety of functions. According to professor Kinley, we can classify the functions of money into the following three categories:
1. Primary functions
2. Secondary functions
3. Contingent functions

i. Primary functions of money: There are two primary functions of money

a. Medium of exchange - Money acts as a medium of exchange as it facilitates exchange through a common medium i.e. facilitates exchange through currency.
b. Unit of value - Money serves as a common medium or unit of value. Money has provided a common yardstick to measure different units in a common denomination known as price.

ii. Secondary functions of money: These are those functions that money performs along with its primary functions. The secondary functions of money can be divided into the following three parts:

a. Store of value - Money performs the function of a store of value. It implies that money can be easily saved and used for future needs.
b. Standard of deferred payments - As money is widely accepted as a medium of exchange, and can be used to store value without much loss of value, it can be used for future payments.
c. Transfer of value - Money can be transferred easily from one place to another and from one person to another. Therefore, with the help of money, purchasing power can be transferred.

iii. Contingent functions of money: The following are the various contingent functions that money performs.

a. Facilitates credit- Money facilitates the functioning of credit instruments such as cheques, promissory notes, bills of exchange etc.
b. Facilitates distribution of income - Factor payments can be made easily in the form of monetary remunerations such as wages, rent, interest and profit.
c. Maximises consumers’ and producers’ satisfaction - Money maximises the satisfaction of consumers and producers.
d. Liquidity - Money is the most liquid of all the assets and wealth.