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(a) Explain two primary functions of money.

(b) What kind of division of labour do we see in the automobile industry? 

(c) Distinguish between sunk and floating capital. Give an example of each. 

(d) Explain the effect of inflation on fixed income groups and borrowers.

(e) Which is the only factor of production that earns profits? Why?

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(a) The two primary functions of money are as follow: 

1. Medium of Exchange: It serves as a medium of exchange and facilitates the buying and selling of goods and services. 

2. Measure of Value: Money acts as a measure of value. The value of each good or service is measured in terms of money (called price). Money also serves as a unit of account. 

(b) We see automobile industry in incomplete process of complex division of labour. In this kind of system the work is divided into different processes and sub-processes in such a way that only a part or a component of a commodity is produced. 

(c) Sunk Capital: It is that kind of capital, which can be used to produce only one type of commodity or service. For example, an ice factory. 

Floating Capital: It is that category of capital, in which all items can be put to alternate uses. For example: money, fuels etc. 

(d) Fixed income group class is worst affected by inflation because the purchasing power of their fixed income goes on decreasing with rising prices. Borrower gains in inflation because the value of money was high when they borrowed but came down when they repaid their debts. But if debtor take loans during inflationary period the position is reversed. 

(e) Entrepreneur is the only factor of production that earns profit because in the entire business sphere no other factor of production shares the loss incurred by the entrepreneur. Entrepreneur is one, who performs all the functions associated with entrepreneurship (including risk bearing).

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