Question

Macroeconomics

Write one to three sentences for each example listed below identifying and explaining which of the three different roles money plays in an economy that it may not satisfy. Justify your selections.

a. Ancient Egypt used rings and jewelry for currency.

b. In the Middle Ages, East Africa’s primary currency was salt.

c. China during the Zhou Dynasty (600-200 BC) used large bronze blades as a form of payment in which they were fitted with ring shapes at one end to be carried more conveniently on belts and straps.

d. An island in the Pacific Ocean called Yap once used Rai Stones. This currency was made of limestone from another island and needed to be shipped by a bamboo canoe to Yap. A typical Rai Stone was 12 feet in diameter and weighed over 8 tons. Each Rai Stone’s value was determined by the journey of the stone during and since construction. For example, if an individual died while trying to move the stone then its value would increase.

Answer 1

First, lets see what the three functions of money are. These are-

• Money is a store of value. Money has intrinsic stored value. It stores value in it.
• Money is a unit of account. The value of money is measured and its the value against which everything is compared. A PlayStation at $400 is more expensive than a shoe that costs $100. This 100 and 400 is the money acting as unit of account.
• Money is a medium of exchange. This means that money is widely accepted as a method of payment.

Now, lets see which one of these is not present in all 4 given cases.

a. Ancient Egypt used rings and jewelry for currency.

Unit of account. The rings and jewery had value and were a medium of exchange, but there is no unit of account. Are there standardized rings? Is there standardized jewlery? No. Everything mustve been valued first at different levels and only then they could be exchanged.

b. In the Middle Ages, East Africa’s primary currency was salt.

Store of value.

Salt goes bad. It cant be used as a store of value. If I keep salt with me for 2 years, it will lose its value as it will be rotten.

c. China during the Zhou Dynasty (600-200 BC) used large bronze blades as a form of payment in which they were fitted with ring shapes at one end to be carried more conveniently on belts and straps.

Unit of account.

Its not defined how much each bronze plate was valued it. If there was no value defined, then it was just a medium of exchange and people had to define their own value of it during each transactions.

d. An island in the Pacific Ocean called Yap once used Rai Stones. This currency was made of limestone from another island and needed to be shipped by a bamboo canoe to Yap. A typical Rai Stone was 12 feet in diameter and weighed over 8 tons. Each Rai Stone’s value was determined by the journey of the stone during and since construction. For example, if an individual died while trying to move the stone then its value would increase.

Unit of account.

Since the value of each stone was not fixed, it meant that it coundnt be taken as a unit of account.