Functions of money and barter Consider an economy in which money does not exist, so that agents rely on barter to carry out transactions. When the economy was small, barter seemed sufficient. However, the economy has now begun to grow. If people in this economy trade three goods, the price tag of each good must list prices, and the economy requiresprices for people to carry out transactions. Suppose that the number of goods people trade increases to 15. Then the price tag of each good must list prices, and the number of prices that the economy requires increases to.
Now suppose that our economy has a money. The government now issues a national currency and there is no longer any barter. In this economy, money and currency are the same because:
1. Just because the government issues currency does not mean that the currency will be accepted as money, since it must be used as a medium of exchange, store of value and standard of value.
2. The fact that the government issues currency means that the currency will be accepted as money by all agents.
3. The fact that the currency is backed by the government means that it will never lose value and will remain a perfect unit of account.
4. Just because the government issues currency does not mean that the currency will be accepted as money, and buyers and sellers still need barter to ensure that money does not lose its value.
Suppose now that our economy is suffering from rapid, ongoing increases in the cost of living. Which characteristic of money is directly negatively impacted in that economy?
1. Medium of exchange.
2. Double coincidence of wants.
3. Store of value.
4. Unit of account.