4.3: Barter System

Question 1

What is the barter system?

Answer 1

Goods and services are traded directly.

Question 2

Problems with the barter system?

Answer 2

1. Each trade has to have something the other wants/ double coincidence of wants
2. Soem goods cannot be split

Question 3

Money

Answer 3

Anything that is generally accepted as payment for goods and services

Question 4

Commodity Money

Examples

Answer 4

Something that performs the function of money and has intrinsic value

Gold, silver, cigarettes

Question 5

Fiat Money

Examples

Answer 5

Serves as money and has no other value

Paper money, coins, digital currency

Question 6

Three functions of money

Answer 6

1. A medium of exchange
2. A unit of account / measure of value
3. A store of value

Question 7

A medium of exchange

Answer 7

Used to buy goods and services

Question 8

A Unit of Account/ Measure of Value

Answer 8

Measures the value of goods and services

Question 9

A Store of Value

Answer 9

You can store purchasing power for the future

Question 10

What backs the money supply?

Answer 10

1. Confidence that it is legal tender
2. Scarce/ not easily reproduced
3. Portable and dividable

Question 11

Note

Answer 11

1. Inflation decreases purchasing power
2. Hyper inflation decreases acceptablility

Question 12

Types of liquidity

Answer 12

1. M1/ highest liquidity includes currency in circulation, savings deposits, checkable bank deposits
2. M2 includes M1 plus time deposits and money market funds (savings)