Monetary System 1

Question 1

Money

Answer 1

The stock of assets that can be readily used to make transactions

Question 2

Functions of money

Answer 2

Medium of exchange
Store of value
Unit of Account

Question 3

Medium of exchange

Answer 3

Money is used to buy goods and services. It eliminates the need for barter by providing a commonly accepted means of payment

Question 4

Store of value

Answer 4

Money transfers purchasing power from the present to the future. It allows individuals to save and defer consumption

Question 5

Unit of account

Answer 5

Money is the standard unit by which everyone measures prices and values. It provides a common basis for comparing the value of different goods and services.

Question 6

Barter economy

Answer 6

Goods are exchanged directly for other goods. Requires a double coincidence of wants where each party must want what the other has to offer, The number of pairwise prices needed for n goods is calculated as 2n(n-1).

Question 7

Monetary Economy

Answer 7

Money is used as an intermediary to buy goods and services. It simplifies transactions as each good has a single price inters of money. Reduces transaction costs and promotes economic efficiency

Question 8

Commodity money

Answer 8

A good, usually gold or silver, used as a medium of exchange. Has intrinsic value in other uses.

Question 9

Commodity backed money

Answer 9

A medium of exchange with no intrinsic value. Its value is guaranteed by a promise that it can be converted into valuable goods e.g. the gold standard where each unit of currency can be exchanged for a specific quantity of gold

Question 10

Fiat money

Answer 10

Money whose value derives entirely from its official status as a means of payment e.g. bank notes issued by central banks. Has no intrinsic value ; its acceptance is based on trust in the issuing authority.