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Chapter 3: Q.2 (page 110)

In prison, cigarettes are sometimes used among inmates as a form of payment. How is it possible for cigarettes to solve the 鈥渄ouble coincidence of wants鈥� problem, even if a prisoner does not smoke?

Short Answer

Expert verified

Smokes satisfy the double coincidence of wants in that both parties to a trade are in need of cigarettes either for consumption or for further trade.

Step by step solution

01

Step 1. Introduction

Double coincidence of wants refers to the requirement that both parties should agree to accept the item the other one is offering at the same time.

02

Step 2. Explanation

Even if he or she is a non-smoker, if the prisoner learns that others in the prison will accept cigarettes as payment, they will be willing to accept cigarettes as payment as well. Rather than forcing convicts to barter and trade favors, cigarettes meet the double coincidence of demands by allowing both parties to a trade to "buy" products or services with them.

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Most popular questions from this chapter

Go to the St. Louis Federal Reserve FRED database, and find data on small-denomination time deposits (STDSL), savings deposits and money market deposit accounts (SAVINGSL), and retail money market funds (RMFSL). Calculate the percentage change of each of these three components of M2 (not included in M1) from the most recent month of data available to the same time one year prior. Which component has the highest growth rate? The lowest growth rate? Repeat the calculations using the data from January 2000 to the most recent month of data available, and compare your results. Use your answers from question 1 to determine which grew faster: the non-M1 components of M2, or the M1 money supply.

Why is simply counting currency an inadequate measure of money?

Was money a better store of value in the United States in the 1950s than in the 1970s? Why or why not? In which period would you have been more willing to hold money?

Why were people in the United States in the nineteenth century sometimes willing to be paid by check rather than with gold, even though they knew there was a possibility that the check might bounce?

Go to http://www.federalreserve.gov/releases/h6/Current/.

a. What have been the growth rates of M1 and M2 over the past 12 months?

b. From what you know about the state of the economy, do these growth rates seem expansionary or restrictive?
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