FAQs on Meaning & Functions of Money: Money & Banking

Question 1

1. What is the meaning of money?

Accepted Answer

Ans. Money is a medium of exchange that is widely accepted in transactions for goods and services. It can be in the form of coins, banknotes, or digital currency. Money serves as a unit of account, a store of value, and a standard of deferred payment.

Question 2

2. What are the functions of money?

Accepted Answer

Ans. Money has three main functions:1. Medium of exchange: Money facilitates the exchange of goods and services by acting as a universally accepted medium of exchange.2. Unit of account: Money provides a common unit in which prices and values of goods and services are measured, allowing for easy comparison.3. Store of value: Money serves as a store of wealth, allowing individuals to save and store purchasing power for future use.

Question 3

3. How does money facilitate banking?

Accepted Answer

Ans. Money plays a crucial role in banking systems. Banks accept deposits from individuals and businesses, which are recorded as account balances. These balances can be withdrawn as cash or used for electronic transactions. Banks also provide loans and credit, which create new money in the economy through the process of fractional reserve banking.

Question 4

4. What is the relationship between money and inflation?

Accepted Answer

Ans. Inflation is the general increase in prices over time, resulting in a decrease in the purchasing power of money. When there is an excessive supply of money in the economy, it can lead to inflation. Conversely, a decrease in the money supply can cause deflation. Central banks use monetary policy tools to manage the money supply and control inflation.

Question 5

5. How does digital currency fit into the concept of money?

Accepted Answer

Ans. Digital currency, such as cryptocurrencies like Bitcoin, is a form of money that exists only in electronic or digital form. It operates independently of traditional banking systems and is decentralized. While not yet widely accepted as a medium of exchange, digital currencies have gained popularity as a store of value and a speculative investment. The rise of digital currencies has prompted discussions about the future of money and its potential impact on the banking industry.

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