Ch.19 Money & Banking Flashcards
What are the problems of barter economy ?
- Difficult to meet double coincidence of wants.
- Lack of a common measure of value.
- Difficult to store wealth.
- Some goods are not divisible.
- Difficulty in carrying goods around.
Elaborate on difficult to meet double coincidence of wants as one of the problems of barter economy.
To carry out exchange, it requires both parties to have the good wanted by each other. Since double coincidence of wants seldom occur, carrying our barter can be difficult.
Elaborate on difficult to store wealth as one of the problems of barter economy.
Wealth is preserved in the form of physical goods. Since some goods are perishable, the cost of storing wealth is high.
Elaborate on lack of a common measure of value as one of the problems of barter economy.
Values of goods are expressed in terms of another commodity. There will be too many exchange ratios which restricts exchange. The costs of setting up so many exchange ratios is high.
Elaborate on some goods are not divisible as one of the problems of barter economy.
Indivisibility of physical goods increases the cost of exchange in barter economy.
1. Some goods cannot be divided into small units for small transactions without a loss in total value. It is difficult to set the exchange ratio for transactions involving less than one unit of these goods.
2. Same type of goods may have different features and qualities. It is difficult to set a uniform exchange ratios for transactions.
Elaborate on difficulty in carrying goods around as one of the problems of barter economy.
Some goods are not portable, it makes transactions costly.
What is money?
Money is anything that is generally accepted as a medium of exchange.
What are the functions of money?
- Medium of exchange.
- Store of value.
- Unit of account.
- Standard of deferred payment.
Elaborate on medium of exchange as one of the functions of money.
Generally accepted means of payment to facilitate exchange of goods and services. Double coincidence of wants is not required in monetary exchange, increasing the volume of exchange and the extent of specialisation.
Elaborate on store of value on as one of the functions of money.
People can store purchasing power in the form of money for future consumption.
Elaborate on unit of account on as one of the functions of money.
Prices and values of goods and services are expressed in terms of money. Money can serve as a common measure of value, saving the transaction cost.
Elaborate on standard of deferred payment on as one of the functions of money.
Future payment are expressed in terms of money.
What are the properties of good money?
- Generally acceptable.
- Stable in supply and value.
- Divisible.
- Durable.
- Portable.
- Homogeneous.
Elaborate on generally acceptable as one of the factors of good money.
Good money should be generally accepted by people for settlement of payments and debts, so it can act as a medium of exchange.
Elaborate on stable in supply and value as one of the factors of good money.
The supply of money should be restricted. A sharp rise in money supply will cause prices to rise, which will decrease the purchasing power of money and its function as a store of value.
Elaborate on divisible as one of the factors of good money.
Money should be divisible into different denominations in order to facilitate transactions of various amounts.
Elaborate on homogeneous as one of the factors of good money.
Money should be uniform in appearance and other features so that its value can be recognised easily.
Elaborate on portable as one of the factors of good money.
Money should be portable enough to facilitate transactions.
Elaborate on durable as one of the factors of good money.
As the volume of transaction increases, money is transferred more frequently. Thus, money should be durable and not easily worn out.
What are the different forms of money?
- Commodity money.
- Convertible money.
- Fiat money.
- Electronic money.
- Deposit money.
What is commodity money? Is it a good money?
It includes all economic goods serving as a medium of exchange. It has intrinsic value. However, it is not a good money, the quantity is hard to control.
What are the examples of commodity money?
Gold, silver, salt and silk.
What is convertible money?
Money (receipt) that could be converted into gold/silver (commodity) of the same value.
What are the examples of convertible money?
Gold and silver certificates.
