Problem 6 Money makes trade easier. Would ... [FREE SOLUTION]

Chapter 12: Problem 6

Money makes trade easier. Would having a money supply twice as large as it currently is make trade twice as easy? Would having a money supply half its current size make trade half as easy?

Short Answer

Expert verified

No, having a money supply twice or half as large as currently will not necessarily make trade twice or half as easy respectively. This is because while availability of money can facilitate trade, its effect is modulated by additional economic factors such as inflation and deflation. These factors can respectively arise from increasing or decreasing the money supply, complicating the relationship between money supply and ease of trade.

Step by step solution

Understanding the Role of Money in Trade

Money, in economic terms, serves three main functions: it is a store of value, a unit of account, and a medium of exchange. In the sphere of trade, money mainly acts as a medium of exchange, facilitating transactions and diminishing the complications of barter trade. So, in the consideration of trade ease, the role of money as a medium of exchange is the most relevant.

Assessing the Impact of Doubling Money Supply

Increasing the money supply doesn't necessarily equate to making trade twice as easy. While having more money available might increase the pace of trade initially, it could lead to inflation over time as there are more cash chasing the same number of goods. This can then devalue the currency. In essence, doubling the money supply can lead to a situation where goods become twice or more expensive, effectively negating any initial gains in trade ease.

Analyzing the Result of Halving the Money Supply

Appslios,a reduction in the money supply doesn't necessarily imply that trade would become half as easy. Shrinking the money supply could potentially increase the value of the currency, leading to deflation. While this could make goods and services more affordable, it could also slow down the pace of trade as people might hoard money in expectation of future price drops. Hence, trade becomes less easy.