Final Term Exam

Money and Banking

Name: Muhammad Ahmed Zaman

Roll # 2193265
Date: 13th January , 2021
Question # 1
There are three goods are produced in an economy by three individuals:
Good producers

Apples orchard owner

Bananas banana grower
Chocolate chocolatier

If the orchard owner likes only bananas, the bananas grower likes only chocolate, and
chocolatier likes only apples, will any trade between these three persons take place in a barter
economy? How will introducing money into the economy benefit these three producers?
Answer:
A barter system is an old method of exchange. This is system has been used for centuries and long before
money was invented. People exchanged services and goods for other services and goods in return. ... The
value of bartering items can be negotiated with the other party. There are some drawbacks of barter
system is Lack of double coincidence of wants, Lack of a common measure of value, Indivisibility of
certain goods, Difficulty in making deferred payments, Difficulty in storing value.
A person holding money can easily exchange it for any commodity or service that he or she might want.
Thus everyone prefers to receive payments in money and then exchange the money for things that they
want. In barter, it is difficult to find a person who wants to buy what exactly the seller wants to sell
Under a pure barter system, trade will be difficult at best. Because the orchard owner likes only bananas
but the banana grower doesn't like apples, the banana grower will not want apples in exchange for his
bananas, and they will not trade. Similarly, the chocolatier will not be willing to trade with the banana
grower because she does not like bananas. The orchard owner will not trade with the chocolatier because
he doesn't like chocolate. Hence, in a barter economy, trade among these three people may well not take
place, because in no case is there a double coincidence of wants. However, if money is introduced into the
economy, the orchard owner can sell his apples to the chocolatier and then use the money to buy bananas
from the banana grower. Similarly, the banana grower can use the money he receives from the orchard
owner to buy chocolate from the chocolatier, and the chocolatier can use the money to buy apples from
the orchard owner. The result is that the need for a double coincidence of wants is eliminated, and
everyone is better off because all three producers are now able to eat what they like best.

Question # 2
why were people in Pakistan in the nineteenth century sometimes willing to be paid by check
rather than with old, even though they knew there was a possibility that the check might
bounce?
Answer:
Sending a check in the mail keeps your money a lot safer than sending cash through the mail. When you
have a check inside an envelope it can be very difficult for others to tell there is even a check inside. But
if you put cash in an envelope it can be much easier for others to tell there is money inside since bills
have their own distinct shape, material, and color. Checks are also less attractive to thieves than cash.
Checks cannot be cashed by just anyone, and that is too much of a hassle for a thief. Thieves want quick
cash and forms of money that are untraceable, and checks are neither of those things. Also, when you
carry checks you don’t have to carry cash or cards on you, making you less of a target while you are out.
Another attractive thing about checks is the timing. It usually takes businesses a day or two to actually
cash the check that you’ve written for them. This means that you have a day or two to make sure you
have the money in your account to cover the check. This can be risky to do, but as long as you handle
your checks wisely, then you should be able to use this feature to your advantage.
When you get paid through direct deposit you need to have a bank account set up. But if you get paid
with checks then you don’t need to use direct deposit or a bank account. If you get paid with checks then
you can just cash them, you don’t have to deposit them into a bank account or deal with electronic funds.
Every time you write a check you are simultaneously writing your own personal receipt to go along with
that purchase. These slips of paper can make budgeting super easy as you can keep those in your
checkbook, and at the end of each week or month you can see an overview of all your spending in one
convenient place.
And because a check was so much easier to transport than gold, people would frequently rather be paid by
check even if there was a possibility that the check might bounce. In other words, the lower transactions
costs involved in handling checks made people more willing to accept them.

Question # 3
If Pakistani government unexpectedly announces that it will be imposing higher tariffs on
foreign goods one year from now, what will happen to the value of the Pakistani rupee today?
Answer:
A tariff is a specific tax levied on an imported good at the border.Tariffs are used to restrict imports
by increasing the price of goods and services purchased from another country, making them less
attractive to domestic consumers. Governments may impose tariffs to raise revenue or to protect domestic
industries from foreign competition. By making foreign-produced goods more expensive, tariffs can make
domestically produced alternatives seem more attractive. Governments that use tariffs to benefit particular
industries often do so to protect companies and jobs. Tariffs can also be used as an extension of foreign
policy: Imposing tariffs on a trading partner's main exports is a way to exert economic leverage.
The rupee will appreciate. The announcement of tariffs will raise the expected future exchange rate for
the rupee and so increase the expected appreciation of the rupee. This means that the demand for rupee-
denominated assets will increase, shifting the demand curve to the right, and the rupee exchange rate
therefore rises.
In the long run, the fall in the demand for a country’s exports leads to a depreciation of its currency, but
the higher tariffs lead to an appreciation. Therefore, the effect on the exchange rate is uncertain.
The devaluation of currency will reduce the value of cash balances and helps to improve the real prices
of both the trade and non traded goods i.e. services
Major imports of Pakistan include Petroleum, Machinery, Chemicals, Drugs and Fertilizers. Petroleum
constitutes about 29% of the total imports of Pakistan, and the demand of petroleum products is highly
inelastic. Due the inelastic nature of these imports, the currency depreciation will only increase the
import bill in terms of local currency.
Tariffs increase the prices of imported goods. Because of this, domestic producers are not forced to
reduce their prices from increased competition, and domestic consumers are left paying higher prices as
a result. Tariffs also reduce efficiencies by allowing companies that would not exist in a more
competitive market to remain open.