Razel Ann Galit Banking and Financial Institutions

BSBA FM2 – G2 Mrs. Aurora Susan Reyes

Chapter 3: Review Questions
RAG

1. What are the sources in inefficiency of a barter system?

The barter system, where goods and services are exchanged directly without using money, has
several sources of inefficiency:

Double Coincidence of Wants: In a barter system, for a trade to occur, both parties must want what
the other party has to offer. This requirement for a double coincidence of wants can be a significant
source of inefficiency. Finding someone with exactly what you want, who also wants what you have,
can be challenging and time-consuming.

Lack of a Common Measure of Value: Money serves as a common measure of value in a monetary
economy, allowing for easy comparison of the value of different goods and services. In a barter
system, there is no universal measure of value, making it challenging to determine the relative worth
of items being traded. This can lead to disputes and inefficiencies in trade negotiations.

Indivisibility: Some goods and services are indivisible, meaning they cannot be easily split into
smaller units for trade. For example, it's challenging to divide a live animal, such as a cow, into
smaller, tradeable portions without reducing its value significantly. This can make certain
transactions difficult or inefficient.

Inefficiencies in Large-Scale Transactions: As trade networks grow and become more complex,
barter systems can become inefficient. Coordinating and tracking a large number of barter
transactions becomes increasingly challenging. For large-scale trade or complex economic activities,
barter systems may not be practical.

Absence of Standardization: Barter transactions often lack standardization, leading to variations in

the quality and quantity of goods and services exchanged. This lack of uniformity can result in
disputes and inefficiencies, as it's challenging to ensure that both parties are satisfied with the
exchange.

2. What is fiat money?

Fiat money is a type of currency that has no intrinsic value and is not backed by a physical
commodity like gold or silver. Instead, its value is established and maintained by government decree
or law, making it the official medium of exchange within a particular country or region. The term
"fiat" comes from the Latin word for "let it be done" or "it shall be."

Fiat money is the most common form of currency used in the world today. It provides governments
with flexibility in managing their economies, including the ability to control inflation and stimulate
economic growth. However, the value of fiat money can be affected by economic factors and
government policies, which is why maintaining trust and stability is essential for its continued
acceptance and usefulness.

3. Explain the expression “Legal tender”

Legal tender is an expression that signifies the mandatory acceptance of a specific currency, as
determined by a government or monetary authority, for settling financial obligations within a
particular jurisdiction. This designation helps establish a standard medium of exchange and ensures
that economic transactions and financial activities can be conducted efficiently and fairly within that
area.

4. Explain briefly the importance of using checks in paying for goods or services purchased.

The use of checks as a method of payment for goods or services purchased offers several advantages
and importance:

Convenience: Checks provide a convenient way to make payments without the need for cash. They
are portable, easy to carry, and can be used for various transactions, including shopping, bill
payments, and more.

Record Keeping: Checks serve as a record of the transaction. When you write a check, you have a
written record of the payment, which can be valuable for budgeting, accounting, and tracking
expenses.

Security: Checks are a secure form of payment. They can be made payable only to a specific
recipient, reducing the risk of theft or unauthorized use compared to carrying large amounts of cash.

Proof of Payment: A canceled check or a copy of a cleared check can serve as proof of payment in
case of disputes or the need to provide evidence of financial transactions.

Delay in Funds Withdrawal: When you write a check, the funds are not immediately withdrawn
from your account. This delay can be advantageous as it allows you to retain control of your money
until the check is presented for payment.

Float: The delay in check processing creates a float, which can be used to earn interest on funds that
are still in your account before the check is cleared.

Flexibility: Checks can be used for a wide range of payment types, including bills, rent, and
purchases, making them a versatile payment method.

Elimination of Cash Handling: For larger transactions, checks reduce the need to handle significant
amounts of cash, which can be a security risk.

Legality: Using checks provides a legal and recognized method for making payments. It offers a clear
paper trail, which can be important for legal or financial purposes.

Business Use: Checks are commonly used in business-to-business transactions and are often
required for payment processing, which can be important for companies that conduct regular
commerce.

Online and Electronic Options: Modern banking allows for electronic checks (e-checks) and online
bill pay services that make check payments even more convenient and efficient.

It's important to note that while checks offer these advantages, they also have some drawbacks,
such as the potential for bounced checks, the need for a bank account, and the time it takes for
checks to clear. As a result, the choice of payment method depends on individual preferences,
circumstances, and the nature of the transaction.
 5. Described:

e-money
E-money, also known as electronic money or digital currency, is a digital
representation of fiat currency (government-issued currency) that is electronically
stored and transacted. E-money is used for making electronic payments, purchases,
and transfers through digital means, such as mobile apps, electronic wallets, and
other digital financial platforms. E-money include digital wallets like PayPal, mobile
payment apps like Apple Pay and Google Pay, cryptocurrencies like Bitcoin, and
various forms of electronic payment systems used for online shopping and financial
transactions. The use and acceptance of e-money have become increasingly
common in the digital age, offering users greater flexibility, speed, and security in
managing their finances.

Bitcoin
A person or group of persons using the alias Satoshi Nakamoto developed Bitcoin, a
decentralized digital money, in 2009. It is a sort of digital currency that leverages
blockchain technology and a peer-to-peer network to facilitate safe and open
transactions. Online purchases, investments, remittances, and use as a store of value
are just a few of the many uses for which bitcoin is frequently utilized. Due to its
distinctive qualities, it has attracted attention in the fields of technology, economics,
and finance. Before joining the Bitcoin ecosystem, prospective users and investors
should be aware of the hazards and exercise caution.

Blockchain
Blockchain refers to the fundamental structure and characteristics of a technology
that has the potential to revolutionize how data and transactions are managed and
secured across various industries.

6. Describe a cashless society. Is it easily attainable?

A cashless society is a concept where cash, in the form of physical currency such as banknotes and
coins, is largely or entirely replaced by digital forms of payment. In a cashless society, financial
transactions are conducted electronically through various means, such as credit and debit cards,
mobile payment apps, online banking, and digital currencies. The use of physical cash becomes
minimal or obsolete. Key characteristics of a cashless society include:

Digital Payments: The primary means of payment are electronic, with transactions conducted
through digital platforms and devices.

Reduced or Eliminated Cash Transactions: The use of physical cash for everyday purchases,
payments, and financial transactions is greatly reduced or eliminated.

Greater Convenience: Electronic payments offer convenience and speed, making it easier to conduct
transactions in a variety of settings, including in-person and online.

Financial Inclusion: Digital payment methods can potentially improve financial inclusion by providing
access to banking and financial services for those who are unbanked or underbanked.
Enhanced Security: Digital transactions are often more secure than cash transactions, as they leave a
digital trail that can be monitored and tracked for fraudulent activities.

Efficiency and Transparency: A cashless society can offer increased efficiency in financial processes,
reducing the administrative burden associated with handling physical cash. Transactions can be
more transparent and easily audited.

Digital Wallets and Mobile Payments: Mobile payment apps and digital wallets become
widespread, allowing people to make payments using smartphones or other electronic devices.

Attaining a completely cashless society is a complex and multifaceted goal. While many
countries have made significant progress toward reducing cash usage, achieving a fully cashless
society faces several challenges:

Infrastructure: To go cashless, a country or region needs a robust digital payment infrastructure,

including secure online and mobile banking services, point-of-sale systems, and a widespread
network of ATMs.

Security Concerns: As digital transactions become the norm, the risk of cybersecurity threats and
fraud can increase. Ensuring a secure and resilient digital financial ecosystem is essential.

Financial Inclusion: While digital payments offer many advantages, they can leave behind those who
do not have access to or are not familiar with digital technology. Achieving financial inclusion for all
is a significant challenge.

Regulatory Framework: Effective regulation is needed to manage digital transactions, protect

consumer rights, and prevent illegal activities. Governments and regulatory bodies play a crucial role
in establishing and enforcing the rules for cashless systems.

Consumer Acceptance: Widespread adoption of digital payment methods may require time,
education, and the development of trust among consumers and businesses.

While some countries and regions have made significant progress toward becoming cashless
societies, it is unlikely that a fully cashless world will be achieved in the near future. Nevertheless,
the shift toward digital payments continues to advance, offering numerous benefits in terms of
convenience, efficiency, and transparency in financial transactions.

7. Describe briefly the mechanics and advantages of the new peso real-time gross settlement
(RCTGS) platform cited on page 37

As of my last knowledge update in September 2021, I do not have specific information on a "peso
real-time gross settlement (RCTGS) platform." However, I can provide some general insights into
what a real-time gross settlement (RTGS) system is and the potential advantages it may offer. A real-
time gross settlement (RTGS) system is a financial infrastructure used by central banks and financial
institutions to facilitate real-time and immediate settlement of high-value transactions, typically in a
country's domestic currency.