Question

Gold and cigarettes can function as money for transactions (a medium of exchange.)

a) What characteristics of gold and cigarettes make them well suited to serve as a medium of exchange or limit their suitability for serving as a medium of exchange? Explain. Be specific. (7-11 sentences)

b) Are gold and cigarettes commodity or fiat money? Are US dollars commodity or fiat money? Explain. (3-5 sentences)

Answer 1

Gold and cigarettes make for medium of exchanges because of its availability and accessibility across globe. The acceptance of gold as global standard for majority of commodities make it best possible medium of exchange. However its affordability is lesser. However cigarettes havr high affordability whereas its global acceptance is much lesser. Thus, gold is better form of exchanges than cigarette.

Gold and cigarettes are classified as commodities as they cannot be converted to paper form as per government decree and hence not fiat money. US dollars can be converted to paper form by government as legal tender and hence is classified as fiat money altogether. It is not commodotised and not readily available for trade on exchanges hence not categorised as fiat money. All major currency like yen and euro and yuan are fiat money.

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