Q4. Explain and evaluate the followi... [FREE SOLUTION]

Chapter 14: Q4. (page 300)

Explain and evaluate the following statements:
a. The invention of money is one of the great achievements of humanity, for without it the enrichment that comes from broadening trade would have been impossible.
b. Money is whatever society says it is.
c. In the United States, the debts of government and commercial banks are used as money.
d. People often say they would like to have more money, but what they usually mean is that they would like to have more goods and services.
e. When the price of everything goes up, it is not because everything is worth more but because the currency is worth less.
f. Any central bank can create money; the trick is to create enough, but not too much, of it.

Short Answer

Expert verified

This means that money has felicitated trade.
This implies that whatever society places values on, be it commodity or paper, becomes money.
It means that government and commercial banks grant loans to the general public, which they use as money.
It suggests that money is the means through which people can satisfy their wants.
The price level goes up when the value of money falls.
This signifies that the central bank has the power to create money.

Step by step solution

Step 1. Explanation for statement a

With the invention of money, trading around the world has become easy. Earlier, in the barter system, when the commodity was used as money, there were certain difficulties faced in trade, such as the double coincidence of wants and indivisibility, but as money evolved and paper money was introduced, it overcame the problems and made trading easy. Further development of money to plastic money and E-money has brought more ease to trade.

Step 2. Explanation for statement b

Money serves as a measure of exchange. It is much important for society to attach value to something to treat it as a medium of exchange, be it attaching value to commodity, metal, paper, or plastic. Therefore, money becomes whatever society places values on.

Step 3. Explanation for statement c

The general public does not produce money itself; the Fed produces money. The individuals cannot lend or deposit money from the Fed; they need commercial banks for that. Therefore, whenever an individual takes debt from a commercial bank, that individual treats it as money as they use it for consumption purposes, and the checkable deposits, which are components of money, are also treated as debt in the U.S.

Moreover, the individuals also borrow money from the government and use it for consumption; therefore, government debt is also treated as money.

Step 4. Explanation for statement d

People desire more money as money gets them what they want as money acts as the medium of exchange. People have unlimited wants. Therefore, in order to stratify their wants, they are always found to crave more money.

Step 5. Explanation for statement e

The increase in the price level implies that the value of money has fallen. The fall in the value of money can be measured by the number of goods a unit of money can buy. Suppose a dollar could buy two potatoes earlier, but now, only one potato can be bought with a dollar. This means that the value of the dollar has fallen, and thus, price levels have gone up.

Step 6. Explanation for statement f

The central bank is vested with the power to create money. The central bank should print only that number of notes that are required within the economy. If the central bank keeps on printing more and more money, it will increase inflation rates and create instability within the economy.