NAME : Oscar Chipoka.

STUDENT NUMBER : 1740567

TUTORIAL DAY : Wednesday. TIME: 1pm to 2pm

TUTORIAL NO : One (1)

Question 1: Readings on Fiat Money

1 (a) Meaning of the phrase “ Money is trust”.

This means that trust can be used a medium of exchange. When you assist
people in attending to their problems, those people will keep a record of the
past assistance that you have rendered to them. Because of that, they will
also be willing to help you in your times of need. This is analogous to the
function of fiat money as the medium of exchange. You keep money because
you know that other people will accept it when you want to transact with
them in exchange for goods and services.

(b) Meaning of the phrase “ Money is memory”.

This means that money is used to keep records relating to one’s trading
past. For example, due to technological advances, there are several types of
payment instruments that have emerged in the world and that these
payment instruments are backed by the informational structure. For
example, the bank issues credit cards and/or debit cards to its bank
account holders. These cards are issued to customers after collecting
information from them and conducting due diligence on them (Know Your
Customer) which information the banks then keep in their custody. This
enables the banks to know the true identity of each of its customers and the
kind of activities the customers are involved in. So, these cards will be
linked to this information that the bank has collected about its customer
and a record will be kept of all your past transactions with the bank. Money
helps to keep track of past activities or transactions (record-keeping role).
And as a result of these numerous technological advances in the monetary
system, the society is moving towards a cashless economy.

(c) Meaning of the phrase “ Money is bubble”.

This means that the fundamental value of money (fiat money) is different
from

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its market value. It implies that money does not have any intrinsic value but
on the other hand, it has a positive value. The market value of money
consists entirely of a liquidity premium. Fiat money is an asset bubble that
has a positive social role to play.

2. Why is the enduring value of the Somali Shilling puzzling? How do

you explain it.

It is puzzling because fiat money is supposed to be issued and backed by

the government through its monetary authority (Central Bank). The
monetary authority has to continue in existence in order for it to continue
backing the value of the national currency (monetary sovereignty). The
monetary authority regulates the value of the national currency through the
use of its various monetary policy instruments. However, in the case of the
Somali Shilling, this currency has continued being in circulation and is even
trading against other foreign currencies in the domestic foreign exchange
market long after the government and the central bank that issued it
collapsed in 1991. The monetary authority was looted during the same year.
The paradox is that the despite the long absence of the central bank and the
government to back up the value of the currency, the value of the shilling
has continued to endure.

The explanation for this puzzle is that there exists market confidence that
supply of this currency is expected to be relatively fixed or constant over
time, hence making its value stable. Even though there is no monetary
authority to replace old notes so as to keep the supply constant and stable,
this function is evidently being performed by those people who are
counterfeiting the currency. However, the level of counterfeiting is not
extreme and as a result, it does not affect the stability of the supply of the
currency.