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.


Rate this question :

How useful is this solution?
We strive to provide quality solutions. Please rate us to serve you better.
Related Videos
Becoming a bilionaire -learning fundamentals of money48 mins
A Letter to God50 mins
Idioms and Phrases43 mins
Goprep Genius Quiz | Analogy and Classification48 mins
Acid - Types and Nomenclature52 mins
Agriculture and its Importance35 mins
Foundation | Permutation and Combination45 mins
Consistent and Inconsistent Equations33 mins
Verb & Tenses46 mins
Learn to Make Your Own Acid Rain and pH Paper at Home!27 mins
Try our Mini CourseMaster Important Topics in 7 DaysLearn from IITians, NITians, Doctors & Academic Experts
Dedicated counsellor for each student
24X7 Doubt Resolution
Daily Report Card
Detailed Performance Evaluation
view all courses