Money
Senior 5 · Economics
Money
Lesson 2 of 4
40 min
Suppose a family put Frw 100,000 aside at the start of 2024. Over 2024 prices in Rwanda rose by an average of 4.8%, and over 2025 by 7.0% (BNR). The notes in the drawer still say 100,000, but they no longer buy what they did. Meanwhile banks paid an average of 9.20% on deposits in 2025. Whether money does its job as a store of value depends on what happens to prices. This lesson sets out what money does, what makes something good money, and what decides how much it is worth.
| Function | Meaning | Problem of barter it solves |
|---|---|---|
| Medium of exchange | Accepted in payment, so goods are sold for money and money is used to buy other goods | No double coincidence of wants is needed |
| Unit of account (measure of value) | Prices, incomes, debts and accounts are all stated in one unit, the franc | One price per good instead of a rate for every pair |
| Store of value | Wealth can be kept as money and spent later | Goods that rot or sicken need not be stored |
| Standard of deferred payment | Debts to be paid in the future (loans, salaries, rents) are fixed in money | "One goat next year" is replaced by an exact sum |
The first two are called the primary functions and the last two secondary functions, because they depend on the first two. Economists also list contingent functions: money is the basis of credit, it allows national income to be measured and distributed as wages, rent, interest and profit, and it lets households and firms compare costs and benefits in one unit.
Definition
Liquidity: how quickly and cheaply an asset can be turned into money without loss of value. Money itself is perfectly liquid; a house or a herd of cattle is not.
| Quality | Why it matters | Cattle | Frw notes and coins | Mobile money |
|---|---|---|---|---|
| General acceptability | The essential quality: without it nothing else counts | Limited | Yes (legal tender) | Widely, where networks reach |
| Portability | Easy to carry large values | No | Yes | Yes |
| Durability | Does not wear out or perish quickly | No: animals die | Fairly: notes wear, coins last | Yes |
| Divisibility | Can be split into small units for small purchases | No | Yes | Yes, to one franc |
| Homogeneity (uniformity) | Every unit of the same value is identical | No: each animal differs | Yes | Yes |
| Recognisability | Easily identified as genuine | Yes | Yes, with security features | Yes, by confirmation message |
| Limited supply (scarcity) | Must not be easy to create, or it loses value | Yes | Controlled by BNR | Backed by bank deposits |
| Stability of value | So it can serve as a store of value and unit of account | Varies with health and season | Depends on inflation | Same as the franc |
| Hard to forge | Protects trust | – | Security threads and watermarks | PINs and encryption |
Definition
Value of money: its purchasing power, the quantity of goods and services one unit of money can buy. It moves inversely with the general price level:
When prices rise (inflation) the value of money falls; when prices fall (deflation) it rises.
Worked example 1: purchasing power from a price index
A consumer price index rises from 100 in the base year to 125 four years later (illustrative).
Each franc now buys 80% of what it bought in the base year: the value of money has fallen by 20%, although prices rose by 25%. The two percentages differ because they are measured from different bases.
Worked example 2: savings in a drawer and in a bank, Rwanda 2024–2025
Average headline inflation was 4.8% in 2024 and 7.0% in 2025; the average deposit rate in 2025 was 9.20% (BNR).
(a) In a drawer for two years. Prices rose by a factor of , so Frw 100,000 then buys what
would have bought at the start: about 11% of its value is lost.
(b) In a bank deposit during 2025. The real rate of return is
The deposit kept its value and gained a little. Money in a drawer is a poor store of value when inflation is positive.
Warning
"Value" has two meanings here. The face value of a Frw 5,000 note never changes; its value in economics, what it buys, changes every month. When you write about the value of money, always mean purchasing power, and link it to the price level.
Important
Discuss. Many rural households hold their savings as livestock rather than as money. Using the functions and qualities of money, explain why they might do this, and what would persuade them to save in money instead.
Khan Academy, "Functions of money" (about 6 minutes). Note how each function is illustrated, then add the fourth function, standard of deferred payment, which this lesson includes.
Practice
Sources and credits
Written by Ganzaa: the text, the diagram, the tables, the worked examples and the practice items. The price index in worked example 1 is illustrative; the calculations in worked example 2 are Ganzaa's.
