Question

1. Explain the differences between commodity money and fiat money. What are the major disadvantages of commodity money?

2. Why is the money multiplier considered to be a potential multiplier rather than an indication of exactly how much multiplication should be expected?

3. What are the inherent disadvantages of a barter system?

4. Explain Gresham's Law.

5. Calculate M1 and M2 using details from the table given below.

	Value (in millions)
Currency	$80
Checkable deposits	30
Traveler's checks	15
Savings deposits	120
Small-denomination time deposits	80
Money market mutual funds	50

6. In an essay no less than 300 words, describe how banks can create money. ( can look at a related Youtube video)

Answer 1

1. Commodity money is some object which has some value in themselves known as intrinsic value and which can be used for buying various goods and services. Commodity money is the value of material from which the commodity is made. For example, copper is a commodity money whose value is the amount of copper in it. Other examples of commodity money are gold, silver, salts and so on.

On the other hand, Fiat money is the value of currency which has been established as money by the government regulations but the currency itself does not have any intrinstic value. It is printed by the central bank in form of some paper and coin and the value of that paper or coin is also established by the government regulatories through some market machanism. Paper notes, bank notes and coins are some examples of Fiat money.

The major disadvantages of commodity money include lack of divisibility as it can not be divided into halfs, quarters or pennies; problem in assigning value to it in case of exchanging it for some other goods; risk of volatility because commodity money can lose value anytime such as gold prices changes every then and now; and perishability because some commodity are perishable in nature.