Question

True or false:

For each of the statements, determine whether it is true or false, then explain in a few sentences why that is the answer. Note: no marks will be given for answers that do not include an explanation.

1. If money stops being a reliable store of value, then it ceases to be useful as a medium of exchange.

2. The gold standard is an improvement over actual gold coinage because it allows the government/central bank to control the nominal supply of money.

3. In the AD-AS model of chapters 9-10, the short-run aggregate supply curve is horizontal because output is supply-determined in the short run.

Answer 1

1. Statement is True.

Explanation: Store of value is one of three characteristics of money that can be utilized as an exchange medium in the market. Also due to storage value, money can be invested in banks and capital markets and also invested money can also be withdrawn by the investors for specific needs. The money is present in the forrm of paper currency, coins , golds and debt papers, each of which has some specific storage value. For its specific storage value, money is acceptable medium for business and financial transactions.

2. The statement is false.

Explanation: Gold Standard is a monetary system in which currency value of a country is linked directly with the Gold value. In other words, it is a standard to measure value of paper currency in a country in terms of Gold whether it is in coins or other forms. Gold standard is an important instrument of the government or Central bank to convert paper currency into Gold so that excess money supply in the economy can be arrested. However, frequent use of this instrument also invites deflationary tendency as people don't have enough money to spend so that a huge demand supply gap is created. At present no country in the world is using Gold standard.

3. The statement is True.

Explanation: The Keynsian Short run supplyy curve is horizontal due to sticky nature of the price in the short run. Under Keynsian AD-AS model, it is assumed that firms will increase output only if the units price of goods increases, while in the short run all input production costs such as labour charges, shipping expenses, raw material costs etc. remain fixed. In the short run,under Keynsian AD-AS model, both outputs and prices of a good is determiined by companies.