Question

1. What is the opportunity cost of holding cash? To answer the question, you should think of others ways to hold your money other than cash.

2.Most of us occasionally engage in barter. For example, I agree to bake a cake for a neighbor who gives me fresh tomatoes from her garden. If it is common, why isn't it the primary means of exchange?

3. Thinking about the examples of commodity monies , which do you think was the most practical? Why?

Answer 1

1. Opportunity cost of holding cash is the value of next best alternative to use case which is foregone.

A person who has enough cash may want to invest it even for short term, as they can earn interest over it.

So the interest rate is the opportunity cost of holding cash.

2. Barter exchange is not primary means of exchange as we do not always want tomatoes, we want other things as well. To find a peraon who has the goods we need and who needs the goods we have, is very challenging and difficult process. The perishable goods may not sustain for that long. Also, the borrowing and lending becomes difficult.

Simce there is no common unit, it is difficult to access how much tomatoes you need in return of a cake.

3. Most common commodity money will be the one which is non perishable, can be denominated into smaller units and it is acceptable by most people.

Metals like gold, copper, shells, salt are aome common commodity money.