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What Distinguishes Money from Other Assets in the Economy

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What Distinguishes Money from Other Assets in the Economy

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  • April 2012
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Macroeconomics Assignment 4 – Lessons 7& 8
Solutions

1. What distinguishes money from other assets in the economy? (2 Mark)

ANS:

Money is different from other assets in the economy because it is the most liquid asset available. Other assets vary widely in their liquidity.

2. What are demand deposits, and why should they be included in the stock of money? (2 Mark)

ANS:

Demand deposits are balances in bank accounts that depositors can assess on demand simply by writing a cheque or by using a debit card. They should included in the stock of money because they can be used to buy goods and services.

3. If there was no item in the economy widely accepted in return for goods and services, how would transactions be carried out in this economy? How efficient would such a system be? (2 Mark)

ANS:

Without some kind of money to facilitate transactions, society would have to resort to barter — exchanging goods or services for other goods and services. This would be a very inefficient system, because in order for trade to take place, there would need to be a double coincidence of wants, the unlikely occurrence that two people each have a good or service that the other wants. In addition, the two individuals would need to agree on a barter ratio, or price, for the two goods.

4. What is the difference between a medium of exchange and a store of value? (4 Marks)

ANS:

A medium of exchange is an asset that is generally acceptable as payment for goods and services. A store of value is an asset that can be used to transfer purchasing power from the present to the future. Stocks and bonds are stores of value, but because they are not generally acceptable as payment for goods and services, they are not media of exchange.

5. What is the difference between commodity money and fiat money? (2 Mark)

ANS:

Commodity money has "intrinsic value," or value in uses other than as money. Fiat money is...

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