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IAI Actuarial Core Principles · Business Economics · Role of money and interest rates in the economy

A household in Pune keeps its savings in a savings bank account so that its purchasing power can be carried to a later year, and it uses the same funds later to buy a flat. Which function of money is mainly being used?

The household is using money as a store of value. It holds purchasing power in a bank account so it can be spent in a later period. This differs from using money to settle a transaction immediately or to quote and compare prices.

  1. AMedium of exchange
  2. BStore of valueCorrect
  3. CUnit of account
  4. DStandard of deferred payment
  5. Measure of velocity

Explanation

Holding balances to preserve purchasing power over time is the store-of-value function. Medium of exchange concerns settling transactions at the time of purchase. Unit of account concerns quoting prices in a common measure. Deferred payment concerns debts denominated in money.

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