Money and Payment Systems Chapter 3

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Questions and Answers

What is the primary role of money in an economy?

To facilitate the process of exchange (correct)

To measure the relative worth of goods and services

To act as a store of value

To create a scarcity of goods and services

What is the primary function of money as a unit of account?

To provide a standard unit of measurement for the value of goods and services (correct)

To act as a medium of exchange

To facilitate credit transactions

To store value over time

What is the primary characteristic of money that allows it to be easily transported?

Portability (correct)

Recognizability

Standardizability

Divisibility

What is the primary problem that arises in a pure barter economy?

The double coincidence of wants Signup and view all the answers

What is the primary function of money as a store of value?

To transport purchasing power from one time period to another Signup and view all the answers

What is the primary characteristic of money that ensures its value remains stable over time?

Stability Signup and view all the answers

What is a necessary condition for a barter economy to exist?

The presence of two individuals who own and desire to trade goods and services Signup and view all the answers

What is a shortcoming of a pure barter economy?

The absence of a standardized unit of value Signup and view all the answers

What is the primary difference between commodity money and full-bodied money?

Full-bodied money has a face value equal to its market value Signup and view all the answers

What is an example of a commodity that was used as a form of money in the past?

Wool Signup and view all the answers

Why did people start using metals like gold and silver as commodity money?

Because of the advancement in knowledge during the industrial revolution Signup and view all the answers

What is the purpose of a trading post in a barter economy?

To eliminate the problem of double coincidence of wants Signup and view all the answers

What is the significant difference between token money and fiat money?

Token money has a lower metallic value than its face value. Signup and view all the answers

Which of the following is an example of a commodity standard?

Gold and silver used as exchange for goods and services Signup and view all the answers

What is the primary function of a debit card?

To electronically transfer funds from the user's bank account to a merchant's account Signup and view all the answers

What is the key characteristic of fiat money?

Its value is higher than its metallic value Signup and view all the answers

What is an example of bank money?

Cheques issued by banks Signup and view all the answers

What is the main difference between a debit card and a stored-value card?

Debit cards draw from the user's bank account, while stored-value cards contain a fixed amount of digital cash Signup and view all the answers

What is the primary function of a smart card?

To hold digital cash that can be loaded from various sources. Signup and view all the answers

What is the primary benefit of using e-cash?

It allows users to pay bills directly over the Internet. Signup and view all the answers

What is the function of an electronic wallet?

To carry out all the functions of a standard wallet. Signup and view all the answers

How can a consumer obtain e-cash?

By setting up an account with a bank that has Internet links. Signup and view all the answers

What is the process of sending an electronic check?

The user has their PC write the equivalent of a check and sends it to the recipient. Signup and view all the answers

What is the name of the company that started testing smart cards in 1995?

Mondex Corp. Signup and view all the answers

Study Notes

Types of Stored-Value Cards

A smart card contains a computer chip that can be loaded with digital cash from an owner's bank account whenever needed.
Smart cards can be loaded from ATM machines, personal computers, or specially equipped telephones.
Example: London-based Mondex Corp., started running tests in 1995, allowing funds to be transferred between consumers and retailers or between individuals.

Electronic Cash (e-Cash)

A form of electronic money that can be used on the Internet to purchase goods or services.
A consumer gets e-cash by setting up an account with a bank that has links to the Internet and then has the e-cash transferred to their PC.

Electronic Checks

Allow users of the Internet to pay their bills directly over the Internet without sending a paper check.
The user writes the equivalent of a check and then sends the electronic check to the other party, who in turn sends it to their bank.

Functions of Money

Medium of Exchange: a medium that can be used to buy and sell goods and services.
Store of Value: an asset that can be used to transport purchasing power from one time period to another.
Unit of Account: a standard unit that provides a consistent way of quoting prices.
Standard of Deferred Payment: facilitates the process of getting and paying credit/debt.

Properties (Characteristics) of Money

Portability
Durability
Divisibility
Standardizability
Recognizability
Acceptability
Stability
Scarcity

Evolution of Money

Barter Economies

Pure Barter Economies: direct exchange of goods and services for other goods and services.
Three shortcomings of a pure barter economy:
- Absence of a method of storing generalized purchasing power.
- Absence of a common unit of measure and value.
- Absence of a designated unit to use in writing contracts requiring future payments.

Commodity Money Economies

Commodity money: physical commodities used as money, having intrinsic or physical value equal to their face value.
Examples: wool, boats, sheep, and corn.
Later, people used metals like gold and silver, especially since the onset of the industrial revolution in the 1800s.

Commodity Standards

Minted coins with nonmonetary values developed, with face value equal to market value.
Token money: money whose metallic value is lower than its face value.

Fiat Money

Money with a commodity value much less than its value as money.
Examples: coins and paper money issued by the central bank.
Fiat money can be issued by the government (like coins and notes) and depositary institutions (like cheques, credit cards).

Electronic Monies (e-Money)

Debit Cards: enable users to purchase goods by electronically transferring funds directly from their bank accounts to a merchant's account.
Stored-Value Card: contains a fixed amount of digital cash, with the simplest example being prepaid cards.

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Test your knowledge of the role and functions of money in the payment system, including its uses as a medium of exchange, unit of account, and store of value.