Question

For each of the statements in Section A, 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. Store of value means that the money can be stored and can be used later when required. If the store of value function of money ceases to exist, it would not be used as a medium of exchange. Becuase when it is used as a medium of exchange it does not get spend simultaneously with the third party but instead kept till the further need of an exchange.

2. The gold standard is better over the gold coinage because, in the gold standard system, the value of the currency is directly linked to the gold. Its value can be changed easily by the government because by increasing or decreasing the price of gold, the value will get change and so is the supply in the economy.

3. True. In the short run, the capital cannot be changed while it is only the labor which fluctuates in obtaining a given amount of output. Since in short run, the wages or the price of the labor do not change, so the output changes without a change in the cost which makes the aggregate supply curve as horizontal.