Money serves three functions in the economy: medium of exchange, unit of account, and store of value.For each of the following statements about inflation, indicate which function of money inflation is hindering.StatementStore of ValueUnit of AccountMedium of ExchangeInflation erodes money's purchasing power. Inflation causes menu costs. 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 is the increase in general price level. Due to inflation purchasing power decreases and people are not able to buy large amount of goods and decreases Due to decrease in value of money, saving and investment of people also decreases. It is a serious issue when economy faces inflation, it is state of rising prices. Sometimes inflation gets out of control and increases to a very large extent giving rise to phenomenon known as hyperinflation. Economic growth declines to a greater extent due to hyperinflation. 1) Inflation erodes money's purchasing power- Because of low purchasing power people cannot exchange more money to buy goods and services.Buying of goods by consumers become less. Therefore medium of exchange would be hindered.Because money acts as medium of exchange,with inflation less money would be exchanged and therefore money as medium of exchange would decrease. Because of inflation,many poor people are not able to buy basic food necessities. For them medium of exchange value of money decreases to a much greater extent. 2) Inflation causes menu costs- Inflation results in menu costs, i.e., the prices of basic supplies increase for firms. For example, in restaurants, menu costs would occur due to inflation. As a result, store of value, which is the purchasing power over time, would decrease because menu costs would not allow to increase the purchase of other requirements. This would make purchasing more raw materials difficult for the restaurant. Because of increase in menu costs, less raw materials would be purchased,therefore decreasing the store of value function of money. 3) In some countries with hyperinflation, prices are posted in terms of U.S dollars rather than the local currency, even though local currency is still used to purchase the good- Due to hyperinflation, the unit of account, which is the local currency, is not used and instead dollar is used. Since the value of local currency has decreased due to hyperinflation, dollar has to be used for purchasing products. Therefore unit of account mostly changes from domestic currency to foreign currency as people lose faith in domestic currency due to hyperinflation.

Answered: Statement Store of Value Unit of…

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Statement	Store of Value	Unit of Account	Medium of Exchange
Inflation erodes money's purchasing power.
Inflation causes menu costs.
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.