Q1. a. Describe the cost savings to individuals and the economy from using money
ID: 1144054 • Letter: Q
Question
Q1. a. Describe the cost savings to individuals and the economy from using money rather than a system of barter. [30] b. Use either the Tobin mean-variance or the Baumol-Tobin transactions demand model to explain a negative relationship between money demand and the interest rate. Briefly comment on how changes in payments technology might affect the demand for money in the model you have chosen. [30] c."Bitcoin is, in theory, unlikely to succeed as a currency, and the situation only becomes bleaker when put into practice" (John Merriman Sholar, 2016). Do you agree with this assessment of Bitcoin and crypto-currencies more generally? What role might government play in determining the future success of crypto-currencies? [40]Explanation / Answer
The main difference between money system & barter system is that in money system a currency has an agreed upon value in the form of a paper or coin which can be exchanged for goods, whereas in barter system goods & services are directly traded or exchanged with each other. Barter system is the ancient concept of trading goods & services between individuals.
Barter system has some drawbacks which costs individuals & economy discussed below.
a) Lack of double coincidence of wants: This is one of the major problem with barter system. What it means is that an individual who wants to sell or buy goods or service should coincide with what another individual wants to buy or sell. One person who wants to sell shoes & buy jute will find it difficult to find an individual who is willing to sell jute & buy shoes.
b) Lack of common measure of value: This is also a serious drawback in barter system. As there is no common measure of the value of goods & services being exchanged as problem arises when it is to decide at proportion the two goods are to be exchanged.
c) Absence of store of value: In a long run it is difficult to store value in the form of goods as holding of goods involves costly storage & overtime the goods deteriorate.
Now considering these problem we come to know that barter system involves high trading costs in the form of searching suitable individuals to exchange goods & services & disutility of waiting cost meaning the time consumed in searching the suitable individual.
Money system removes these high trading costs & brings saving costs to individuals & economy due to below advantages.
a) Money or currency system eliminates the double coincidence of wants problem by serving as a medium of exchange that is accepted in all transactions, by all parties, irrespective of whether they desire each other’s' goods and services. Thus money as a medium of exchange saves costs & time in searching suitable individuals.
b) As money or currency has an agreed upon measure (unit) of value solves the problem of absence of common measure (unit) of value to value goods & services. It enables knowing the value of a good or service in terms of price. The price helps in deciding the required quantity of goods to sell or buy which saves costs to individuals & economy.
c) As money has ability to store value or wealth in future it enables storing of wealth in the form of currency & different denominations. Also money system is more liquid as money is readily accepted everywhere. Money is easily transported store of value which reduces costs of transfers.
d) Money helps in planning production & consumption which saves costs of producers as well as consumers.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.