Money serves three functions in the economy: medium of exchange, unit of account, and store of value. Which of the following statements describes how inflation affects the ability of money to serve as a unit of account? Check all that apply. In some countries with hyperinflation, prices are posted in terms of U.S. dollars rather than the local currency, even though the local currency is still used to purchase the good. Inflation erodes money's purchasing power. Inflation causes menu costs.

Question
Asked Nov 26, 2019
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Money serves three functions in the economy: medium of exchange, unit of account, and store of value.
 
Which of the following statements describes how inflation affects the ability of money to serve as a unit of account? Check all that apply.
 
In some countries with hyperinflation, prices are posted in terms of U.S. dollars rather than the local currency, even though the local currency is still used to purchase the good.
 
Inflation erodes money's purchasing power.
 
Inflation causes menu costs.
 
 
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Expert Answer

Step 1

Money is anything which is accepted by the economy as a medium of exchange, unit of account and store of value. Thus, any commodity which has these three basic characteristics is known as money in the economy. The main function of money is to facilitate the trade by acting as the medium of exchange in the economy. The inflation can affect the functions of money in various ways.

Step 2

In some countries the US dollar is used to post the prices of the commodity even though the local currencies are used to purchase the commodities from the market. This is because, the varying value of the local currency leads to the loss of ability of local currency to act as a unit of account for the future. This is why the economy uses a stable currency such as the US dollar to do so. Thus, the hyperinflation adversely affects the ability of money to serve as a unit of account.

Step 3

When there is inflation in the economy, the economy needs to update the prices of the goods and services according to the rate of inflation. This means that the firm needs to reprint all the prices in their ...

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