In countries where the monetary system has broken down, what are some alternatives to which people have resorted to carry out exchange There are many alternatives to money.
Gold for one has been the alternative for money for centuries. Gold coins are the smallest unit of currency that can actually be traded with another commodity. Since gold follows the 6 properties of ideal money (durability, Portability or Transportability, Divisibility, Uniformity, Non counterfeit ability, Acceptability according to me it is one of the safest bet in many countries.Another possibility would be Bit coin.
This is a very innovative currency that is digital. According to the Bitcoin. org website: “Bit coin is a consensus network that enables a new payment system and a completely digital money”(Bitcoin. org, 2013). It is the first decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen.
From a user perspective,” Bit coin is pretty much like cash for the Internet. Bit coin can also be seen as the most prominent triple entry book keeping system in existence” (Bitcoin.org, 2013).From a user perspective, Bit coin is nothing more than a mobile app or computer program that provides a personal Bit coin wallet and allows a user to send and receive bit coins with them.
This is how Bit coin works for most users. Behind the scenes, the Bit coin network is sharing a public ledger called the "block chain". This ledger contains every transaction ever processed, allowing a user's computer to verify the validity of each transaction.The authenticity of each transaction is protected by digital signatures corresponding to the sending addresses, allowing all users to have full control over sending bit coins from their own Bit coin addresses. In addition, anyone can process transactions using the computing power of specialized hardware and earn a reward in bit coins for this service.
This is often called "mining". Another option would be what is called MPC or Military Payment Certificates: In some countries to make sure that the volatility in dollars cannot disrupt the economy, military personnel were paid in MPC.This happened especially around the time of the War of Vietnam. Then we come to something called Ithaca Hours. Workers in Itacha used to pay in hours, it takes into consideration the time value of money and hence time can be an alternative to money.
As of now more it said that more that $100 0000 worth of hours is in circulation. Other possibilities that have already been in process includes: Cell phone-based payments, for instance, have become widespread overseas in recent years and are now a standard means of paying for just about anything in Japan.“The Times Online notes that of Japan’s six competing cashless payment systems, “many” are built into wireless phones” (Richie, 2010). In total, Japanese consumers are estimated to carry some 120 million cashless payment chips. In the United States, companies like PayPal are “making it easy to make purchases and swap money using only a mobile phone. Rather than trying to replace credit and debit cards, American companies like Square and GoPayment are equipping phones to work with them” (Richie, 2010).
“As the New York Times explains, the credit and debit card issuers “stay in the middle, extracting a fee with each swipe or bump” of the mobile phone” (Richie, 2010). It may take a while for consumers to abandon cash completely, but in many ways, even here in the U. S. , we already are a cashless society. Question 2 (20 points) a.
(10 points) Why is universal acceptability such an important characteristic of money Money is generally defined as a medium of exchange or any object used as a means of payment for good or services or in settlement of debt.The function of money is to serve as a “liquid” unit of wealth. This means it is freely convertible into any goods, service or other forms of wealth. If a unit of money is not universally accepted it will therefore not be “liquid”, and you have basically got a barter system (you will have to find someone who will accept your cash before you can make any exchange). So we need to understand that if money can not be accepted anywhere in the world, then it would be impossible and very difficult for consumers, businesses and governments even countries to conduct any kind of transactions with or among themselves.
Lets take for example: If one region used salt as money whereas another region used sand as money – then when a person takes sand as money to the region which used the salt as money they would not be able to perform any sort of transaction. The reason for this is, as sand would not be accepted as money in the region, which used salt as money. We can see that it would be the same way if one country has a currency that is not universally accepted, and then the currency of that country cannot be used in another country to conduct a transaction.Universal acceptance makes it possible for buyers and sellers within a market to obtain what they desire. It is a store of value for goods and services and this value also is formed through universal acceptance.
If a seller places a value on a computer it has selling for example, through the universal acceptance of money the seller can obtain money in return from a prospective buyer - without that buyer wanting to offer a box of donut (for argument sake) for the computer being sold.What other characteristics can you think of that might be important to market participants? One other characteristic based on the ones I have mentioned in question 1 that might be important to market participants is that of durability. Your market participants want to know that the money being held or used by them is of a good quality and cannot be easily damaged. For example an individual may have in their possession their last money, they want to be ensured that it cannot be easily torn. Another characteristic that comes to mind is of much concern is the likelihood that a particular currency or dollar can be duplicated.
If an individual so happens to be tricked and given counterfeit money, and this is discovered when the person spends such money - they may either be held liable or be told that such monies is of no value since it is not real. Issues like these are of major concern to market participants. Finally, market participants also want to know that money in there position can be easily carried around without much effort - hence this age of debit cards is one which is of much favor to many of us, since debit cards are also considered as money.One needs to note that one major advantage of carrying around a debit card is the fact that individuals feel more secure, as even if they were to be robbed, there would be little or no cash in their possession. “If an economy had only two goods (both nondurable), there would be no need for money because exchange would always be between those two goods. ” What important function of money does this statement disregard? First of all it is important to list what the functions of money is.
Money has 4 four basic function namely according to the AmosWeb: 1) medium of exchange, 2) Unit of account, 3) Store of value and 4) Standard of deferred payment (Amosweb, 2012). It is my opinion that in this regard the most important function of money is that money is a medium of exchange. The primary function of money is to act as the medium of exchange. Individuals uses money to buy and sell goods.
Buyers give up money and receive goods. Sellers on the other hand give up good and receive money.If we did not have have money it will be more like we are in a barter economy where one good is traded directly for another. They key to successful barter is trade is according to the Amos website is that each trader has to want what the other traders has (Amosweb, 2012).
Without this the economy becomes inefficient. Traders spend more time seeking trades and less time producing goods. If we take an example: Suppose Jessica Hall heads into town with a basket full of hand-crafted hats which she hope to trade for a pair of Levi pants.If the local Levi tailor needs a hat than there would be a double coincidence of want and they are ready to trade, however if the tailor has no desire to have the hat then there is not a double coincidence of wants and Jessica will not get her Levi’s. So now Jessica will have to spend a great deal of time looking for someone else that has got a good the tailor wants.
The time spend on this is time she could have spent on fabricating additional hats. So we can see money eliminates this need because everyone is willing to accept money in payment for goods. Without money exchange we would also be very limited to our choice of goods.You would only be able to exchange one specific good for another specific good, then it would becomes difficult in terms of what happens if the one good has a higher value than the other good. It would be very time consuming.
PART 2 Question 1 (15 points) How is hyperinflation related to the quantity of money in a nation Hyperinflation first of all can be defined as a rise in prices exceeding 50% per month, or as stated by Investopedia “There is no precise numerical definition to hyperinflation. Hyperinflation is a situation where the price increases are so out of control that the concept of inflation is meaningless” (Investopedia, 2009).Suppose we buy ourselves a candy bar that costs us $1 at the beginning of the year, that same candy bar would cost us $130 by the end of the year! The effect of hyperinflation in a country leads its currency to quickly lose most of its value until this currency becomes nearly worthless. If we take Germany and Zimbabwe as an example: in Germany, people routinely used cash as firewood and as toys for the kids, while in Zimbabwe ( I know this as I am from South Africa and have some friends in Zimbawe), they used it as toilet paper. One needs to realize that with hyperinflation prices to tend to double very quickly.
It is said that even in some countries, during hyperinflation, when people went out to eat at a restaurant, the price of their meal doubled even before they finished eating. When a government overspends, it must borrow from a central bank to make up the difference, leading to a rapid rise in the money supply. This causes a shortage of products and services and erodes the value of the money, which drives prices up dramatically; not by the amount that most of us are used to when gas prices go up or when food prices go up but an extremely fast rise in the prices of everyday necessities.In order to explain the link between inflation and the money supply, economists use what's called the quantity theory of money. It centers on the Quantity Equation. This basically says that economic output (gross domestic product) is equal to how big the money supply is, this is multiplied by the velocity of money, which is how many times the same dollar gets spend throughout the year.
Real GDP is equal to how big the money supply is I multiplied by the velocity of money.In macroeconomics it boils down to that the money supply times the velocity of money is equal to the price level times the nominal GDP. For example: suppose your price level is 1, while nominal output is $200. The money supply is $100. When using the above formula basically it means that the average dollar bill in circulation is getting spent two times during the year because if you work out the velocity it comes to 2.
Another way of looking at this is that money is turning over at a rate of two times per year.If the central bank decides to doubles the money supply from 100 to 200 dollars while the nominal GDP and the velocity of money stay the same it would mean that the price level will now double. When the central bank increased the money supply by 100 %the price levels also increased by 100 %. As one can see here there the money supply is directly connect to the price level and this explains what happens with hyperinflation.
So we can conclude that hyperinflation has got a direct influence on the quantity of money supplied in the market. The higher the hyperinflation the more money supplied in the market.