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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

19. The table below shows hypothetical values, in billions of dollars, of different forms of money.

a. Use the table to calculate the M1 and M2 money supplies for each year, as well as the growth rates of the M1 and M2 money supplies from the previous year.

b. Why are the growth rates of M1 and M2 so different? Explain.


2019202020212022
Currency880895900906
Money market mutual fund shares680685683692
Saving account deposits5,5005,7805,9686,105
Money market deposit accounts1,2141,2451,2741,329
Demand and checkable deposits1,000972980993
Small denomination time deposits8408711,1331,576
Traveler's check5543
3-month treasury bills1,9862,3742,4362,502

In Brazil, a country that underwent a rapid inflation before 1994, many transactions were conducted in dollars rather than in reals, the domestic currency. Why?

Why is simply counting currency an inadequate measure of money?

Go to the St. Louis Federal Reserve FRED database, and find data on currency (CURRSL), traveler鈥檚 checks (TVCKSSL), demand deposits (DEMDEPSL), and other checkable deposits (OCDSL). Calculate the M1 money supply, and calculate the percentage change in M1 and in each of the four components of 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.

Why have some economists described money during a hyperinflation as a 鈥渉ot potato鈥� that is quickly passed from one person to another?
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