Reading 24: Money, the Price Level, and Inflation LOS a习题精 2010, comparing, exchange, expect

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Session 6: Economics: Monetary and Fiscal Economics
Reading 24: Money, the Price Level, and Inflation

LOS a: Explain the functions of money.

When comparing a barter economy with an economy that uses money as a medium of exchange we would expect increased efficiencies due to a reduction in which of the following?

A) The need to specialize.

B) Transaction costs.

C) Nominal interest rates.

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Money functions as a medium of exchange because it is accepted as payment for goods and services. Compare this to a barter economy, where if I have goat and want an ox, I have to find someone willing to trade. Finding someone takes time and time is costly. With money, I can sell the goat and buy the ox. Thus, transaction costs are reduced. Having money as a medium of exchange would not reduce the inflation rate, interest rates, or the need to specialize in the production of those goods in which we have a comparative advantage (low opportunity cost producer).

 

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Which one of the following is least accurate with regard to money serving as a medium of exchange? Without money to serve as a medium of exchange:

A) the transaction cost of exchange would increase.

B) people’s standard of living would probably decline.

C) people would continue to enjoy their current standard of living and countries would become more self-sufficient in production of goods and services.

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Without money to serve as a medium of exchange people around the world would see their current standard of living decline, countries would be less self-sufficient in the production of goods and services, transaction costs of exchange would increase, and the gains from international trade would be limited.

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A discussion of the economic functions of money and banking produced the following statements:

Statement 1: Direct exchange of commodities is less efficient than money exchange because of the search costs involved in finding an individual with whom to trade.

Statement 2: The cost of funds for borrowers is lower in an economy that features depository institutions than it would be in an economy that lacked them.

Are these statements CORRECT?

Statement 1

Statement 2

A) Correct Correct

B) Correct Incorrect

C) Incorrect Correct

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Both statements are correct. Using money as a medium of exchange allows transactions to take place between any two individuals who have something of value to trade, whereas direct exchange of commodities requires each individual to find another who has the commodity he wants and is willing to accept the commodity he has. Acting as financial intermediaries is one of the economic functions of depository institutions. They reduce the cost of borrowing compared to what it would be if every borrower had to search for savers with funds available to lend.