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Money serves three primary functions: it serves as a means of commerce, a unit of account, and a store of value. Money can be used as a means of trade in the exchange of goods and services. Money is used as a unit of account to determine the relative worth of products and services. Finally, it is a store of value since it is the most liquid asset and its worth can be simply kept throughout time (Fullcoll.edu, 2017).
Money loses value over time due to rapid inflation. A depreciated currency may be forced to be devalued. This loss of value means that money becomes cumbersome as a medium of exchange as more of it is required to perform a small value transaction. Additionally, money that has lost value is hard to use effectively as a currency. A currency’s value determines the economic strength of a country. From this perspective, rapid inflation implies a weak economy which means that money is impeded in doing its functions. Last but not least, inflation affects the future value and present value of money. High rates of inflation mean that stored money depreciates and becomes less useful (Fergusson, 2010).
Impact of Fed’s Policy
The Fed’s policy has been to increase the supply of money in the economy. This shall hinder money to perform its three basic functions. This is largely due to the fact that an increased supply of money n the economy shall result in inflation. Inflation then makes it hard for the currency to perform its functions as discussed in the above section (Federal Reserve Bank of San Francisco, 2017).
Federal Reserve Bank of San Francisco. (2017). How does monetary policy affect the U.S.
economy? Retrieved February 02, 2017, from frbsf.org: http://www.frbsf.org/education/teacher-resources/us-monetary-policy-introduction/real-interest-rates-economy/
Fergusson, A. (2010). When Money Dies: The Nightmare of Deficit Spending, Devaluation, and
Hyperinflation in Weimar Germany. PublicAffairs; 1 edition.
Fullcoll.edu. (2017). fullcoll.edu. Retrieved February 02, 2017, from FUNCTIONS OF
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