Economics Questions: The Barter System

ANSWER SCHEME
ECO551/553
APRIL 2010

QUESTION 1

a) A barter trade system is a system whereby people exchange goods for other goods.

( with example)

b) There are many problems facing the barter trade. Three of these problems are:

i) Double coincidence of wants ii) Rate of exchange iii) Divisibility ( with explanation)

(b) The four functions of money are as follows:

i) Medium of exchange ii) Unit of account iii) Store of value iv) Standard for deferred payment ( with explanation)

QUESTION 2

a) Functions of a financial system

(i) Mobilisation of funds

(ii) Flexibility in investment

(iii) Implementation of monetary policy

(iv) An efficient savings process

( with explanation)

(b) Participants in the financial system The financial system consists of individuals, companies, markets and government that are in some way involved in assisting the process of exchange of financial assets. The individuals,companies and government, which need to borrow, may be called the “deficit” units. However, if they have surplus funds to lend, they would be called the “surplus” units.

The participants and the roles played by them can be categorized as follows: (i) Borrowers and lenders

(ii) Capital raisers and investors

(iii) Financial intermediaries

(iv) Service providers

( with explanation)

QUESTION 3

a) Loanable Fund Theory

•determines the interest rate using the demand and supply analysis in the bond market. •determinants of demand and supply of assets :wealth, expected returns risk, liquidity, price.

Price of bonds, P Bs

Bs2

P(i)

Bd2

Bd

Q 0 Q1 Quantity of bonds,B

b) i)

Price of bonds, P Bs1

Bs2

P(i)

Bd1

Q1 Q2 Quantity of bonds,B

Increase in government borrowing, increase the supply of bonds at each bond price.

(with explanation)

ii)