Question

1. What are the advantages/disadvantages of the competing types of representative currencies?

2. Suppose people perceive a greater risk of their local bank closing. How does this alter the money supply? If you were on the FOMC, how would you respond? What risk does this pose?

Answer 1

1. Currency is an asset in an economy that people use regularly to purchase goods and services from other people. Representative Currency is an item such as a token or piece of paper that has no intrinsic value but can be exchanged on demand for a commodity that does have intrinsic value, such as gold, silver, copper, and even tobacco. An item has intrinsic value if it still has value even if it is not used as money.

Advantages:

(i) Economical:

Representative Currency practically costs nothing to the Govern­ment. Currency notes, therefore, are the cheapest media of exchange. If a country uses paper money, it need not spend anything on the purchase of gold or minting coins. The loss which a country suffers from the wear and tear of metallic money is also avoided.

(ii) Convenient:

Representative Currency is the most convenient form of money. A large amount can be carried conveniently in the pocket without anybody knowing it. It is very risky to carry on one’s person Rs. 5,000 in cash, but not in notes. It possesses, in a very large measure, the quality of portability which a money material should have. In a very small bulk, it can contain a very large value.

Disadvantages:

(i) Representative Currency is of no value outside the country of issue. Gold and silver coins are accepted even by foreigners, as they have got some intrinsic value.

(ii) There is a possibility of the damage to Representative Currency. Fire may burn it; if the place is flooded, it is gone; it may also be eaten up by white ants.