Question

1. Functions of money and barter

Consider an economy in which money does not exist, so that agents rely on barter to carry out transactions. When the economy was small, barter seemed sufficient. However, the economy has now begun to grow.

If people in this economy trade five goods, the price tag of each good must list 1.______prices, and the economy requires 2._____prices for people to carry out transactions.

Suppose that the number of goods people trade increases to 19. Then the price tag of each good must list prices, and the number of prices that the economy requires increases to 3. ____

.Now suppose that our economy has a money. The government now issues a national currency and there is no longer any barter.

In this economy, money and currency  4. (are the same, are not the same) because: 5.

Just because the government issues currency does not mean that the currency will be accepted as money, since it must be used as a medium of exchange, store of value and standard of value.

Just because the government issues currency does not mean that the currency will be accepted as money, and buyers and sellers still need barter to ensure that money does not lose its value.

The fact that the government issues currency means that the currency will be accepted as money by all agents.

The fact that the currency is backed by the government means that it will never lose value and will remain a perfect unit of account.

Suppose now that our economy is suffering from rapid, ongoing increases in the cost of living. Which characteristic of money is directly negatively impacted in that economy? 6.

Double coincidence of wants

Unit of account

Store of value

Medium of exchange

Answer 1

1. Functions of money and barter

If people in this economy trade five goods, the price tag of each good must list 1. prices, and the economy requires 2. prices for people to carry out transactions.

Answers for 1. and 2. numbers are already given in the question.

Suppose that the number of goods people trade increases to 19. Then the price tag of each good must list prices, and the number of prices that the economy requires increases to 3. 342.

The number of prices in a barter system is done by quoting a price of every item in terms on every other item i.e. if there are 3 items, apple, orange and banana then price of apple will be quoted in terms of orange and banana, price of orange will be quoted in terms of apple and banana, price of banana will be quoted in terms of apple and orange. Hence, there would be a total of 3 * 2 = 6 prices. Similarly, when the number of goods is 19, there would be a total of 19 * 18 = 342 prices.

Now suppose that our economy has a money. The government now issues a national currency and there is no longer any barter. In this economy, money and currency  4. are the same because: 5. The fact that the government issues currency means that the currency will be accepted as money by all agents.

Currency is a medium of exchange of goods and services which is accepted by everybody in the society because it is guaranteed by the government of that country. When the government issues money, it is a currency because it is backed by the government and would be accepted by everyone in the country.

Suppose now that our economy is suffering from rapid, ongoing increases in the cost of living. Which characteristic of money is directly negatively impacted in that economy? 6. Store of value.

Money acts as a store of value which means that it can be used in the future to buy goods and services if it is not spent in the present. But, if there is a rapid increase in the cost of living, then the value of money which is stored in the past would decrease with the cost of living and hence this characteristic of money would be directly negatively impacted.