20. Explain four ways in which a firm might increase its profits by raising the
ID: 1118028 • Letter: 2
Question
20. Explain four ways in which a firm might increase its profits by raising the wages it pays 21. List and describe the three functions of money. 22. What is the difference between a central bank like the Bank of Canada and a commercial bank like the Bank of Montreal? 23. Describe how banks create money. If the Bank of Canada wanted to use all three of its policy tools to decrease the money supply, what would it do? 24. What distinguishes money from other assets in the economy? tis commodity money? What is fiat money? Which kind do we use?Explanation / Answer
21. Money is anything which is generally acceptable as a medium of exchange. Functions of money includes:
a) Medium of Exchange: It means that money acts as a medium for the sale and purchase of goods and services. In the absence of money, goods were exchanged for goods. This required double coincidence of wants. Accordingly, an exchange was difficult, and therefore limited. The introduction of money has separated the acts of sale and purchase: a double coincidence of wants is no longer required. The exchange is now much simpler and is, therefore, unlimited. This has raised the overall level of economic activity in an economy.
b) Measure of Value or Unit of Value: Money serves as a measure of value in terms of unit of account. Unit of account means that the value of each good or service is measured in the monetary unit. Measurement of value was very difficult in the barter system: one good was valued in terms of the other. There was no common unit of value. An introduction of money has removed this difficulty. Now, each good is valued in terms of money.
c) Standard of deferred payments: Deferred payments refer to those payments which are made sometimes in the future. When we borrow money from somebody, we have to return both the principal as well as interest amount. It is difficult to make such transactions in terms of goods and services. Money performs this function most effectively.
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