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Monetary Set 1
Monetary Set 1
Before the emergence of standardized 货币, people relied on barter, the direct
exchange of goods and services. This system, however, was limited by the "double
coincidence of wants," requiring both parties to desire each other's offerings. To
overcome this constraint, societies began using commodity money, which consisted of
physical goods with intrinsic value, such as livestock, grain, or precious metals.
Commodity money had several advantages over barter. It was standardized, making it
easier to compare values and facilitate transactions. It was also durable and
transportable, allowing wealth to be stored and moved over long distances.
The invention of metal coins marked a significant turning point in the history of money.
Around the 7th century BCE, the Lydians of Anatolia (modern-day Turkey) began
minting electrum coins, a naturally occurring alloy of gold and silver. These coins were
standardized in weight and stamped with an official mark, providing a reliable and
recognizable form of currency.
Lydian electrum coins
The adoption of metal coins spread throughout the ancient world, with gold and silver
becoming the dominant forms of currency. Coins offered several advantages over
commodity money, such as greater durability, portability, and divisibility. They also
facilitated larger transactions and enabled more complex economic systems to develop.
During the Middle Ages, the use of paper money emerged as a convenient alternative to
carrying large quantities of coins. Initially, paper money emerged in the form of receipts
from merchants or goldsmiths, representing deposits of precious metals. Over time,
these receipts became more standardized and widely accepted, evolving into true paper
money.
The development of banking played a crucial role in the evolution of paper money.
Banks began issuing notes representing deposits of gold or silver, which could be
exchanged for goods and services. This facilitated trade and credit, further stimulating
economic activity.
The Transition to Fiat Currency and the Rise of Central Banks
In the modern era, most countries have transitioned to fiat currency, which is legal
tender backed by the full faith and credit of the issuing government. Fiat currencies are
not pegged to any physical commodity, such as gold or silver. Instead, their value is
determined by supply and demand and the overall strength of the economy.
US dollar bills
The establishment of central banks in various countries has played a critical role in
managing the money supply and ensuring the stability of fiat currencies. Central banks
are responsible for conducting monetary policy, influencing interest rates, and
maintaining a stable financial system.
The advent of digital technologies has revolutionized the way we use money. Electronic
payments, online banking, and mobile wallets have become increasingly common,
offering greater convenience and speed. Additionally, cryptocurrencies, such as Bitcoin,
have emerged as a new form of digital money, operating outside traditional banking
systems.
Bitcoin logo
QUESTION 02.
In prison, cigarettes can serve as a form of currency because they are a widely desired
commodity that is easily divisible and portable. This allows them to function as a
medium of exchange, even for those who do not smoke.
To understand how this works, let's consider the "double coincidence of wants"
problem, which is a fundamental concept in economics. This problem arises when two
individuals want to trade goods or services, but each one wants what the other has. For
example, suppose a prisoner named John wants a toothbrush, but he only has
cigarettes. Meanwhile, another prisoner named Mary has a toothbrush, but she only
wants food.
Without a common medium of exchange, John and Mary would not be able to trade
their goods. However, if cigarettes are widely accepted as a form of currency, then John
can use them to purchase the toothbrush from Mary. This is because Mary can then use
the cigarettes to purchase other goods or services that she desires from other inmates.
In this way, cigarettes can solve the double coincidence of wants problem and facilitate
trade even among non-smokers. This is because they are a widely desired commodity
that is easily divisible and portable, making them a convenient medium of exchange.
Here are some additional reasons why cigarettes are often used as currency in prisons:
1. Durability: Cigarettes are relatively durable and can be stored for extended
periods without losing value.
2. Fungibility: All cigarettes are essentially the same, making them easily
interchangeable as units of exchange.
3. Portability: Cigarettes are small and lightweight, making them easy to conceal
and transport within prison walls.
4. Limited access to alternatives: In many prisons, inmates have limited access to
cash or other forms of currency, making cigarettes a more accessible and
practical option.
5. High demand: Smoking is prevalent among prison populations, creating a strong
demand for cigarettes as a commodity.
While the use of cigarettes as currency in prisons can be problematic due to the health
risks associated with smoking, it nevertheless reflects the ingenuity of inmates in
adapting to their constrained environment and finding ways to facilitate trade and
exchange.
QUESTION 03.
Introducing money into the economy will benefit these three producers in several ways.
First, it will make it easier for them to trade with each other. Instead of having to find
someone who wants what they have and has what they want, they can simply sell their
goods for money and then use that money to buy the goods they want. This will make it
possible for them to specialize in producing the goods they are best at, and then trade
those goods for the goods they need.
Second, money will make it easier for these producers to store value. In a barter
economy, producers must consume all of the goods they produce immediately, or they
will spoil. With money, they can save their earnings and use them to purchase goods
later on. This will allow them to smooth out their consumption over time, and avoid
having to go without essential goods during times of scarcity.
Third, money will make it easier for these producers to invest in their businesses. With
money, they can purchase new tools and equipment, hire additional workers, and
expand their production capacity. This will allow them to increase their profits, and
improve their standard of living.
Overall, introducing money into the economy will make it easier for these three
producers to trade, store value, and invest. This will lead to increased production, higher
profits, and a higher standard of living for everyone.
QUESTION 04.
Here are some of the reasons why cavemen did not need money:
1. They lived in a communal society. Cavemen shared everything they had with
each other, so there was no need for them to trade goods or services.
2. They were not specialized producers. Cavemen did not specialize in producing
one type of good or service. Instead, they were generalists who could do a
variety of things. This meant that they did not need to trade with others in order to
get the goods they needed.
3. They had a limited range of goods and services. Cavemen did not have a lot of
different goods or services available to them. This meant that there was no need
for them to have a complex system of exchange.
As human societies became more complex and specialized, the need for money arose.
Money made it easier for people to trade goods and services with each other. It also
provided a way for people to store value over time.
Today, money is an essential part of our economy. It allows us to buy and sell goods
and services, to save for the future, and to borrow money. Without money, our modern
economy would not be able to function.
QUESTION 05.
5. Most of the time it is quite difficult to separate the three functions of money. Money performs
its three functions at all times, but sometimes we can stress one in particular. For each of the
following situations, identify which function of money is emphasized.
a. Brooke accepts money in exchange for performing her daily tasks at her office, since she knows she
can use that money to buy goods and services.
This situation illustrates the medium-of-exchange function of money. We often do not think why we
accept money in exchange for hours spent working, as we are so accustomed to using money. The
medium-of exchange function of money refers to its ability to facilitate trades (hours worked for money
and then money for groceries) in a society.
b. Tim wants to calculate the relative value of oranges and apples, and therefore checks the price per
pound of each of these goods as quoted in currency units.
In this case we observe money performing its unit-of-account function. If modern societies did not use
money as a unit of account, then the price of apples would have to be quoted in terms of all the other
items in the
market. This quickly becomes an impossible task. Suppose that a pound of apples sells for 0.80 pounds
of oranges, half a gallon of milk, one third of a pound of meat, 2 razor blades, 1.5 pound of potatoes,
etc.,
c. Maria is currently pregnant. She expects her expenditures to increase in the future and decides to
increase the balance in her savings account.
Maria is contemplating the store-of-value function of money. As a medium of exchange and unit of
account, measures of money known as M1 or M2 have no important rivals. With respect to the store-of-
value function,however, there are many assets that can preserve value better than a checking account.
Maria’s choice to preserve the purchasing power of her income by increasing her savings account
balance is fine for a small period of time. For a period of 20 years, however, you might choose to buy a
U.S. Treasury bond that matures
in 20 years (as many grandparents have done as a way to pay for their grandchildren’s educations)
QUESTION 06.
Was money a better store of value in the United States in the 1950s than in
the 1970s? Why or why not? In which period would you have been more
willing to hold money?
Yes, money was a better store of value in the United States in the 1950s than in the
1970s. This is because the inflation rate was much lower in the 1950s than in the
1970s. Inflation is the rate at which prices for goods and services are rising, and it
erodes the purchasing power of money. In the 1950s, the average annual inflation rate
was 2.2%. In the 1970s, the average annual inflation rate was 7.1%. This means that a
dollar in 1950 could buy more goods and services than a dollar in 1970.
As a result of the lower inflation rate, people were more willing to hold money in the
1950s. This is because they knew that their money would not lose its purchasing power
as quickly as it would in the 1970s. Therefore, they were more likely to save money and
less likely to spend it immediately.
Here is a table comparing the inflation rates in the United States in the 1950s and
1970s:
QUESTION 07.
Why were people in the United States in the nineteenth century sometimes
willing to be paid by check rather than with gold, even though they knew
there was a possibility that the check might bounce?
Even though there was a possibility of checks bouncing, people in the United States
during the nineteenth century were still willing to accept them as payment for several
reasons:
While there was always some risk associated with accepting checks, the benefits of
convenience, recordkeeping, and the expanding money supply outweighed the
concerns for many people in the nineteenth century. As the banking system continued
to develop and trust in banks grew, checks became increasingly accepted as a reliable
form of payment
QUESTION 08.
In ancient Greece, why was gold a more likely candidate for use as money
than wine?
Gold was a more likely candidate for use as money in ancient Greece than wine for
several reasons:
As a result of these factors, gold emerged as the dominant form of currency in ancient
Greece. It remained the standard for monetary transactions for centuries, and its
influence can still be seen in modern currencies, which often use gold as a reference
point for their value.
QUESTION 09.
It is not unusual to find a business that displays a sign saying “no personal
checks, please.” On the basis of this observation, comment on the relative
degree of liquidity of a checking account versus currency
It is not unusual to find a business that displays a sign saying "no personal checks,
please." This is because personal checks are less liquid than currency. Liquidity refers
to how easily an asset can be converted into cash. Currency is the most liquid asset, as
it can be used to make purchases directly. Personal checks, on the other hand, are not
as widely accepted, and they can take several days to clear. This means that
businesses are less likely to accept personal checks, as they may not be able to access
the funds immediately.
There are a few reasons why personal checks are less liquid than currency. First,
personal checks can be bounced if the account holder does not have sufficient funds in
their account. This can be a major inconvenience for businesses, as it can tie up their
funds for several days. Second, personal checks can be forged, which can result in
financial losses for businesses. Finally, personal checks can be lost or stolen, which can
also lead to financial losses.
In conclusion, the observation that some businesses do not accept personal checks is a
reflection of the relative liquidity of checking accounts versus currency. Checking
accounts are more liquid than personal checks, but they are still not as liquid as
currency. This is why businesses often prefer to accept cash or electronic payments.
QUESTION 10.
History has it that there are various definitions of money, discuss the key
elements common in all definitions.
Throughout history, various definitions of money have emerged, reflecting its evolving
role in societies. While specific characteristics may vary, several key elements remain
common across diverse definitions of money. These fundamental attributes define
money's essence and enable it to fulfill its essential functions.