Economics Chapter 2: Money

Questions and Answers

The act of exchanging goods for goods is called...

barter

Provision for making payments in future is known as...

deferred payments

The primary function of money is as a medium of...

exchange

In the context of ______, the standard of deferred payments refers to...

money Signup and view all the answers

What are the difficulties faced in the barter system?

Double coincidence of wants, lack of common measure of value, difficulties in storage of goods, indivisibility of certain goods, and problems in making deferred payments. Signup and view all the answers

Name the definitions of money according to Prof Crowther?

Money is anything that is generally acceptable as a means of exchange and at the same time acts as a measure and a store of value. Signup and view all the answers

Which types of money came into existence due to the evolution of money?

All of the above Signup and view all the answers

Paper money is a substitute for metallic money.

True Signup and view all the answers

What is electronic money?

Monetary value that is stored and transferred electronically through various means. Signup and view all the answers

What defines legal tender money?

Money that is backed by law and cannot be refused in transaction. Signup and view all the answers

What are the qualities of money?

General acceptability, divisibility, durability, cognizability, portability, homogeneity, and stability. Signup and view all the answers

What is black money?

Money which is received in cash but not accounted for and on which tax is not paid. Signup and view all the answers

The most liquid asset is...

money Signup and view all the answers

Match the following types of money with their descriptions:

Animal Money = E.g., cow, sheep, goat used for exchange Commodity Money = Based on climatic conditions and culture Metallic Coins = Coins made of durable metals like gold and silver Plastic Money = Debit and credit cards used in transactions Signup and view all the answers

Identify the types of money used in the information.

Plastic money, Paper money, Electronic money, Credit money Signup and view all the answers

Explain any two of the types of money.

Plastic money allows for electronic transactions without using cash. Paper money is physical currency issued by the government. Signup and view all the answers

Study Notes

Introduction to Money

Barter system involves exchanging goods directly, but led to fundamental economic difficulties.
The invention of money transformed economic activities by facilitating trade and satisfying human wants.

Difficulties in Barter System

Double Coincidence of Wants: Essential for exchange; both parties need to want what the other offers.
Lack of Common Measure of Value: No standardized units to compare commodities, complicating transactions (e.g., comparing milk to rice).
Storage Issues: Perishable goods like milk and vegetables were hard to store.
Indivisibility of Goods: Some commodities, such as animals or houses, cannot be divided for trade, complicating exchanges.
Deferred Payments: Difficulty in future payments using perishable goods made loan repayments challenging.

Definitions of Money

Prof Crowther: Describes money as generally acceptable for exchange and a means to measure and store value.
Prof Walker: Defines money by its functions and capabilities.

Evolution of Money

Money developed through various phases, each linked to societal needs.
Types of Money include:
- Animal Money: Early barter involving live animals.
- Commodity Money: Natural commodities used for trade influenced by cultural and climatic factors.
- Metallic Money: Utilized durable metals but faced issues with scarcity.
- Metallic Coins: Standardized pieces with governmental seals emerged for uniformity and legal recognition.
- Paper Money: Substituted for metal coins, issued solely by government and central banks.
- Bank Money/Credit Money: Bank deposits facilitating transactions via cheques and drafts.
- Plastic Money: Debit and credit cards improving the ease of transactions.
- Electronic Money: Digital funds stored and transferred online through devices.

Qualities of Money

General Acceptability: Widely recognized and used for trades.
Divisibility: Easily divisible into smaller units for transactions.
Durability: Should endure repeated use without significant degradation.
Cognizability: Recognizable features to prevent confusion.
Portability: Easily transportable without hassle.
Homogeneity: Coins and notes of similar denomination must be identical in appearance.
Stability: Should maintain a steady value over time for reliable economic function.

Functions of Money

Primary Functions:
- Medium of Exchange: Acts as a tool for buying and selling goods/services.
- Measure of Value: Expresses the value of commodities in price.
Secondary Functions:
- Standard of Deferred Payments: Facilitates borrowing and lending activities.
- Store of Value: Allows saving and provision for future needs.
- Transfer of Value: Enables the transfer of economic power across people and locations.

Concept of Black Money

Refers to income received unaccounted for and untaxed; can arise through both legitimate and illegitimate means.
Contributes to corruption and economic instability, prompting measures like demonetization to control it.

Economic Exercises

Correlate functions of money with respective descriptions.
Identify types of money in real-world transactions.
Discuss the implications and challenges surrounding barter systems and modern monetary systems.

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Explore the fundamental concepts of money and the barter system in this engaging quiz. Understand the difficulties of barter transactions and the importance of money as an invention in economic history. Test your knowledge on these essential economic principles.