CDS (I) 2021 General Knowledge · Question 25 of 120

Correct — D, Used for regulating consumption. The other three are the textbook functions of money and this one is not on the list. Money's first and foremost role is that it acts as a medium of exchange, which is what removes the double coincidence of wants that makes barter so difficult — the rice-grower no longer has to find a cloth-seller who happens to want rice. Money also acts as a convenient unit of account, because the value of all goods and services can be expressed in monetary units and relative prices can then be calculated from them. And money can act as a store of value, because unlike rice it does not perish, is cheap to store and is acceptable to anyone at any time, so wealth can be carried forward for future use. Regulating consumption is not a property of money at all; it is something a government may try to do with taxes, subsidies, rationing or credit rules, and money is merely the medium through which those measures work.

• (a)Acts as an intermediate in the exchange process — This is the medium-of-exchange function, the primary one, phrased in slightly unusual words. Because money stands between the two sides of a transaction, neither party needs to want what the other is selling.
• (b)Acts as a store of value — A genuine function. Money is not perishable, its storage costs are low, and it is accepted by anyone at any time, so purchasing power can be held for later. The function works well only while the value of money is reasonably stable, which is why high inflation erodes it — but an imperfect function is still a function.
• (c)Used as the unit of account — Also genuine, and the one that makes prices comparable. If a pencil costs Rs 2 and a pen Rs 10, the pen is worth five pencils; without a common unit each pair of goods would need its own exchange ratio.

Money is defined by what it does rather than by what it is made of. The standard list gives three primary or derived functions — medium of exchange, unit of account and store of value — with a fourth, standard of deferred payment, often added because debts are written in money terms. Anything that performs these reliably can serve as money, which is why cattle, cowries, metal coin, paper notes and now digital balances have all done so. Legal tender adds a legal layer on top: it is money a creditor is under compulsion to accept in settlement of a claim.

A 'not a function' item is answered by holding the standard list and testing each option against it, and the wrong option here is a policy objective dressed up as a monetary property. That is the general shape of the trap — controlling inflation, allocating resources, redistributing income and regulating consumption are all things done with policy instruments, and money is the medium those instruments act through, not the actor. One nuance worth carrying for later papers is that the store-of-value function is the one that fails first when money loses purchasing power quickly, and in a severe inflation people abandon it for goods or foreign currency while continuing to use money for day-to-day exchange.

• The primary function of money is to act as a medium of exchange, which removes the need for a double coincidence of wants in barter.
• Money serves as a unit of account, allowing the value of all goods and services to be expressed in the same units and relative prices to be computed.
• Money serves as a store of value because it does not perish, is cheap to store and is generally acceptable.
• A standard of deferred payment is often listed as a fourth function, since debts and contracts are written in money terms.
• Legal tender money is money that a creditor is under compulsion to accept in settlement of claims.
• A general rise in the price level lowers the purchasing power of money, weakening its store-of-value function.

• Accepting a policy objective as a function of money because it sounds economic.
• Rejecting the store-of-value function because inflation weakens it; the function exists even when it performs imperfectly.
• Missing the medium-of-exchange function when it is described in unfamiliar words such as 'intermediate in the exchange process'.

As a which-is-not-a-function item, or as a statements question distinguishing the functions of money from the functions of a central bank.

• practice — not a real PYQ

  The difficulty of the double coincidence of wants in a barter economy is removed principally by money's function as a

  • (a)store of value
  • (b)medium of exchange
  • (c)unit of account
  • (d)standard of deferred payment

  Answer(b) medium of exchange — because money stands between the two sides of a transaction, neither party has to want what the other is offering.

• practice — not a real PYQ

  Which function of money is most directly weakened by a high and persistent rate of inflation?

  • (a)Medium of exchange
  • (b)Unit of account
  • (c)Store of value
  • (d)Legal tender status

  Answer(c) store of value — purchasing power held in money falls as prices rise, which is why people in a severe inflation shift their savings into goods or other currencies.