Money and Inflation
MCD 2090 Tutorial 5 Money and Inflation Ch.12&13 Tutorial Questions
1. What is money? What distinguishes money from other assets in the economy? Briefly explain the difference between fiat money and commodity money giving examples of each. Why current deposits are included in the supply of money?
Money is the commonly accepted set of assets in an economy that people regularly use to buy goods and services from other people. • Commodity money takes the form of a commodity with intrinsic (real) value. – Examples: gold, silver, cigarettes. • Fiat money is used as money because of government decree. – It does not have its own value. – Examples: coins, currency, cheque deposits. • Current deposits are balances in bank accounts that depositors can access on demand by using a debit card or writing a cheque. These accounts serve as cash money with us.
2. What are the main functions of money? How does inflation affect the ability of money to serve each of these functions? The functions of money: ▪ Medium of exchange: “an item that buyers give to sellers when they want to purchase goods and services” ( Gans, et al., 2012. p. 680/276). It is commonly accepted by all as a medium to buy goods and services. ▪ Unit of account: “the yardstick people use to post prices and record debts” ( Gans, et al., 2012. p. 680/276). Money is used as a unit to keep accounts (for example, company accounts, prices, profits etc) ▪ Store of value: “an item that people can use to transfer purchasing power from the present to the future” ( Gans, et al., 2012. p. 680/276). ▪ Liquidity: “the ease with which an asset can be converted into the economy’s medium of exchange” ( Gans, et al., 2012. p. 680/276). Money makes an asset liquid after the asset is sold.
Inflation will cause loss of confidence in the money as such because with inflation the value of money will fall. How fast the value
1. What is money? What distinguishes money from other assets in the economy? Briefly explain the difference between fiat money and commodity money giving examples of each. Why current deposits are included in the supply of money?
Money is the commonly accepted set of assets in an economy that people regularly use to buy goods and services from other people. • Commodity money takes the form of a commodity with intrinsic (real) value. – Examples: gold, silver, cigarettes. • Fiat money is used as money because of government decree. – It does not have its own value. – Examples: coins, currency, cheque deposits. • Current deposits are balances in bank accounts that depositors can access on demand by using a debit card or writing a cheque. These accounts serve as cash money with us.
2. What are the main functions of money? How does inflation affect the ability of money to serve each of these functions? The functions of money: ▪ Medium of exchange: “an item that buyers give to sellers when they want to purchase goods and services” ( Gans, et al., 2012. p. 680/276). It is commonly accepted by all as a medium to buy goods and services. ▪ Unit of account: “the yardstick people use to post prices and record debts” ( Gans, et al., 2012. p. 680/276). Money is used as a unit to keep accounts (for example, company accounts, prices, profits etc) ▪ Store of value: “an item that people can use to transfer purchasing power from the present to the future” ( Gans, et al., 2012. p. 680/276). ▪ Liquidity: “the ease with which an asset can be converted into the economy’s medium of exchange” ( Gans, et al., 2012. p. 680/276). Money makes an asset liquid after the asset is sold.
Inflation will cause loss of confidence in the money as such because with inflation the value of money will fall. How fast the value