Question

In the old type of family household economy or "self-supporting community," which in general survived on country estates, even in Europe, until the nineteenth century, the economic processes of production and consumption can be viewed as self-contained and closed to the outside world. The self-contained aspect of the household disappeared as the various households associated with each other to exchange products, which in turn encouraged greater specialization in production. The earlier type of rural household became increasingly specialized in agricultural production and was merged into the larger economic unit. This larger unit, composed of a group of specialized economic units linked to each other through cooperation and mutual exchange, formed an exchange economy.

   "The course of economic development is often represented as if an exchange economy, with direct exchange but without money, preceded the money economy, which is then represented as if it were essentially different, and on an independent, higher plane of development. On the contrary, a more careful inquiry shows that the development of money has always been parallel to that of the exchange economy; that the exchange of goods and the use of money have mutually aided each other at every stage; and that the development of a coordinated monetary system of the modern type is approximately coincident with the effective establishment of the general exchange economy. Furthermore, there has never been an exchange economy of any degree of development -- one with an organized exchange of products between independent economic units -- without money." [Gustav Cassel, The Theory of Social Economy (New York: Harcourt, Brace; 1932), pp.47-8]

(a) Describe the characteristics of an efficient monetary system. What are the potential sources of cost reduction specific to money that could improve the efficiency of a monetary system?

(b) Explain how improvements in a monetary system would act to promote greater specialization in production, and thus, expand the volume of mutually beneficial trade. Why would improvements in a monetary system compliment and operate in parallel with improvements in an exchange economy? Carefully explain.

Answer 1

*characteristics of an efficient monetary system

1.control of money supply

Monetary system consist of money supply,it should be decreased or increased according to different economic conditions.for example if there is inflation money supply should be decreased.

2.regulation by government

In order to maintain stable money supply government should use fiscal policy and in that use taxes.for example reduce taxes to increase money supply and vice versa

3.central bank can use monetary policy and increase interest rate to reduce money supply and vice versa.

*potential sources of cost reduction

Cost can be reduced by using advanced technologies and providing incentives to workers.because of all this,production will increase efficiently and as a result efficiency of monetary system can be improved.

*monetary system and specialization in production.

Proper and improved monetary system will help in increasing production and firm profits.because of increase in profit there will be specialization in production.if inflation is controlled too much,it will not allow for firms to increase their profit but a considerable amount of inflation will increase profit of firms and the money will be used for specialization in the process of production.

*monetary and exchange economy parallel

They can be parallel because some goods can be exchanged for other goods.money will do its work and carry out its functions.sometimes monetary system is less efficient so at that time exchange economy can operate parallel to monetary system.