Review Questions – Page 37

Questions:

1. What are the sources in inefficiency of a barter system?

A barter system, which involves the exchange of goods and services directly without the use of
money, can be inefficient due to several inherent limitations and challenges. Here are some
sources of inefficiency in a barter system:

 Double Coincidence of Wants: In a barter system, for a trade to occur, both parties
must have something the other party wants. This requirement for a double coincidence
of wants can be a significant source of inefficiency because finding someone with
precisely what you need who also wants what you have can be difficult and time-
consuming.

 Lack of a Standard Measure of Value: Money serves as a standard measure of value in

modern economies, making it easier to compare the value of different goods and
services. In a barter system, there is no universally accepted unit of value, making it
challenging to determine fair exchange rates between various goods and services.

 Difficulty in Divisibility: Some goods or services may be indivisible or difficult to divide

into smaller units for exchange. This can lead to inefficiency, as individuals may not be
able to exchange them for goods or services of equal value.

 Inefficiencies in Transportation and Storage: Certain goods may be perishable or

challenging to transport and store. In a barter system, individuals may face difficulties in
preserving the value of these goods over time or moving them to where they are
needed, resulting in potential losses.

 Limited Specialization and Productivity: The absence of a common medium of

exchange like money can hinder specialization and productivity improvements.
Specialization often leads to more efficient production processes and increased
economic growth, but it may be limited in a barter-based economy.

 Lack of a Store of Value: Money also serves as a store of value, allowing people to save
their wealth over time. In a barter system, it may be challenging to store value
efficiently, especially if the goods you possess are subject to spoilage, depreciation, or
fluctuating demand.

 Difficulty in Making Deferred Payments: In modern economies, credit and lending

systems allow for deferred payments and loans with interest. In a barter system, it can
be challenging to facilitate such arrangements, limiting economic growth and
investment.
  Transaction Costs: The process of negotiating and completing a barter trade can be
time-consuming and involve significant transaction costs, including search costs (finding
a suitable trading partner), bargaining costs (negotiating terms), and monitoring costs
(ensuring the quality and quantity of exchanged goods).

 Limited Scope for Complex Economic Activity: Barter systems tend to be less suitable
for complex economic activities, such as international trade or large-scale industrial
production, which often require a more efficient and standardized medium of exchange.

Due to these inefficiencies and challenges, most economies have transitioned from barter
systems to monetary systems that use currency as a medium of exchange. Money simplifies
transactions, promotes specialization, and facilitates economic growth by addressing many of
the limitations associated with barter-based trade.

2. What is fiat money?

Fiat money refers to money, such as paper currency that has no value apart from its use as money.
People accept paper currency in exchange for goods and services partly because the government has
designed it to be legal tender, which means the government accepts paper currency in payment of taxes
and requires that individuals and firms accept it in payment of debts.

Fiat money is the dominant form of currency in most countries today, it is important to note that its
value relies on the stability and integrity of the issuing government. If trust in the government's ability to
manage its currency erodes, it can lead to currency devaluation or even hyperinflation, which can have
significant economic consequences.

3. Explain the expression “Legal tender”

Legal tender means the government accepts paper currency in payment of taxes and requires that
individuals and firms accept it in payment of debts. The expression "legal tender" refers to a financial
concept and status given to a specific form of currency or money by a government. When a government
designates a particular type of currency as legal tender, it means that this currency must be accepted as
a valid means of payment for goods, services, and debts within the country's legal and financial
framework. It's important to note that while legal tender status requires acceptance of the designated
currency for most transactions, there may be some exceptions or limitations specified by law or
regulations. Additionally, the legal tender status of a currency does not guarantee its value; the value of
a currency can fluctuates due to various economic factors, including inflation and government policies.
Overall, the concept of legal tender is crucial in ensuring the smooth functioning of a country's monetary
system and facilitating economic transactions.

4. Explain briefly the importance of using checks in paying for goods or services purchased.

The importance of using checks in paying for goods or services depends on individual preferences,
specific circumstances, and the payment preferences of the parties involved in the transaction. Using
checks for paying for goods or services purchased offers several advantages and can be important in
various situations:
  Convenience: Checks provide a convenient way to make payments, especially for larger
transactions. They are easy to write and can be used for both in-person and remote payments.

 Record Keeping: Checks create a paper trail of transactions. Each check has a unique identifier,
and the payee's bank records the transaction, providing a clear record of the payment for both
the payer and payee. This can be helpful for bookkeeping and financial tracking.

 Delayed Payment: Unlike cash, which is an immediate form of payment, checks allow for
delayed payment. This can be advantageous for buyers who may need time to gather funds or
for sellers who are willing to extend payment terms to customers.

 Security: Checks are more secure than carrying large amounts of cash, reducing the risk of theft
or loss. They can also be canceled or replaced if lost or stolen, providing a level of security for
both parties involved.

 Proof of Payment: A canceled check, once processed by the bank, serves as proof of payment.
This can be valuable in resolving disputes or confirming that a payment was made.

 Concise Documentation: Checks often include a memo line where the purpose of the payment
can be noted, making it clear why the payment was made.

 Electronic Options: Many checks are processed electronically today, making the payment
process faster and more efficient. Electronic check processing, often referred to as e-checks, can
be done online, reducing the need for physical paper checks.

 Payment Flexibility: Checks offer flexibility in terms of the amount of payment and the payee.
They can be used for one-time payments, recurring payments, and a wide range of transactions.

 Banking Relationships: Using checks can help maintain a positive relationship with banks, as
they are a standard financial instrument. Consistent and responsible check usage can contribute
to a good banking history.

 Regulatory Protections: Many countries have laws and regulations in place to protect
consumers and businesses in check transactions, offering legal recourse in case of fraud or
disputes.

While checks have their advantages, it's essential to note that they also have some limitations and
drawbacks. They can take time to clear, may incur fees, and can be subject to potential fraud if not
handled securely. Additionally, in an increasingly digital age, electronic payment methods such as
credit/debit cards and digital wallets have become more popular due to their speed and convenience.

5. Described:
 e-money
E-money, short for electronic money, refers to a digital representation of fiat currency
(government-issued currency like the US dollar or euro) that is stored electronically and
used for electronic transactions. E-money is designed to facilitate digital payments,
making it a convenient and efficient alternative to physical cash for various financial
 activities. E-money has become increasingly popular as digital payment technology has
advanced, offering greater convenience and accessibility in a cashless society. It plays a
significant role in modern financial systems, enabling faster and more efficient
transactions in both developed and emerging economies.

 Bitcoin
Bitcoin is a decentralized digital cryptocurrency that was invented in 2008 by an
individual or group of individuals using the pseudonym Satoshi Nakamoto. It is the first
and most well-known example of a type of digital currency known as cryptocurrency.
Bitcoin has garnered significant attention and interest as both a financial asset and a
technology innovation. Its potential to disrupt traditional financial systems and offer
financial inclusion to unbanked populations has led to ongoing debates and discussions
about its role in the global economy.

 Blockchain
A blockchain is a distributed and decentralized digital ledger technology that securely
records transactions across multiple computers or nodes. It is designed to be
transparent, tamper-resistant, and highly secure. The term "blockchain" comes from the
way data is structured: transactions are grouped into "blocks," and these blocks are
linked together in a chronological and cryptographic chain. Blockchain technology has
the potential to revolutionize various industries by providing a secure, transparent, and
efficient way to record and verify transactions and data. Its applications continue to
expand as developers and businesses explore new use cases for this innovative
technology.

6. Describe a cashless society. Is it easily attainable?

A cashless society is a hypothetical scenario in which physical cash, such as coins and paper money, no
longer plays a significant role in everyday financial transactions. Instead, digital and electronic payment
methods, such as credit cards, debit cards, mobile payment apps, and electronic transfers, become the
primary means of conducting financial transactions.

Is a cashless society easily attainable? The feasibility and pace of achieving a cashless society vary from
one country to another and depend on several factors:

 Technological Infrastructure: The availability of reliable internet access and digital

payment infrastructure is crucial. Countries with advanced technology infrastructure are
more likely to progress toward a cashless society faster.

 Government Policies and Regulation: Government policies, regulations, and incentives

can play a significant role in promoting or hindering the adoption of cashless payments.
Supportive regulations and government-led initiatives can accelerate the transition.

 Consumer Behavior: People's comfort level with digital transactions and their
willingness to adopt cashless payment methods are critical. Education and awareness
campaigns can influence consumer behavior.
  Business Acceptance: Widespread acceptance of digital payments by businesses,
retailers, and service providers is essential. Incentives for businesses to adopt cashless
payment options can facilitate the transition.

 Security Measures: Strong security measures and consumer trust in digital payment
systems are necessary to address concerns about fraud and data breaches.

 Financial Inclusion: Efforts to ensure that vulnerable and underserved populations have
access to digital financial services are essential to prevent financial exclusion.

A fully cashless society may not be easily attainable in the near term, but many countries are making
significant strides toward reducing cash usage and promoting digital payments. The pace of progress will
likely continue to vary, and some regions may retain a preference for physical cash for the foreseeable
future.

7. Describe briefly the mechanics and advantages of the new peso real-time gross settlement
(RCTGS) platform cited on page 37