Q. 43.5( 2 Votes )

What is the role of currency in the economy? Explain.

Answer :

Money is most significant function is as a medium of exchange to make easy transactions. Without money, all transactions would have to be conducted by barter, which involves direct exchange of one good or service for another.

Role of money in the economy

Promotes economic growth

Barter system was full of difficulties of exchanging goods and services between individuals. In the absence of easy exchange of goods and services, the barter system worked as an obstacle to the division of labour and specialisation among individuals which is an important factor for increasing productivity and economic growth. Further, the process of economic growth leads to the expansion of production of goods and services and consequential rise in incomes of the people.

Promotes investment

From the viewpoint of development, another important role of money lies in making the magnitude of investment independent of the current level of savings. In a barter system, the goods not consumed constitute the savings as well as investment. That is, invest �ment is not different from current savings. The greater the current savings, the greater the investment. However, in a modern economy, this is not so. Whereas it is households which save in the form of money, it is the firms which invest money in capital goods.

Money involves in the credit creation process

Credit creation is the other function which is carried on by the commercial banks. One of the main functions of the commercial bank is credit creation. It is the banks that create credit for the producers to invest in the economy. The banks make the credit available by accepting the deposit from the people. The investment of the investors makes the economy better off, and investment is made available by the bank.

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