Ranga: 0618441387
ECS3701 EXAM PACK
William Scott
Ranga: 0618441387
June 2020-November 2016
:
+
2
7
6
8
0
7
7
,Ranga: 0618441387
9
ECS3701: MONETARY ECONOMICS
MAY/JUNE 2020 EXAM MEMO
RANGA: 0618441387
ANSWER ALL THE QUESTIONS
Question 1 [20 marks]
1.1
Explain in detail why money is useful and how it facilitates exchange. (6)
Money is any item or verifiable record that is generally accepted as payment for goods
and services and repayment of debts, such as taxes, in a particular country or socio-
economic context. It is a liquid asset used in the settlement of transactions. It functions
based on the general acceptance of its value within a governmental economy and
internationally through foreign exchange. The current value of monetary currency is
not necessarily derived from the materials used to produce the note or coin.
Money is often defined in terms of the three functions or services that it provides.
Money serves as a medium of exchange, as a store of value, and as a unit of account.
Medium of exchange. Money's most important function is as a medium of exchange
to facilitate transactions. Without money, all transactions would have to be conducted by
,Ranga: 0618441387
barter, which involves direct exchange of one good or
, Ranga: 0618441387
service for another. The difficulty with a barter system is that in order to obtain a
particular good or service from a supplier, one has to possess a good or service of
equal value, which the supplier also desires. In other words, in a barter system,
exchange can take place only if there is a double coincidence of wants between two
transacting parties. The likelihood of a double coincidence of wants, however, is
small and makes the exchange of goods and services rather difficult. Money
effectively eliminates the double coincidence of wants problem by serving as a
medium of exchange that is accepted in all transactions, by all parties, regardless of
whether they desire each others' goods and services.
Store of value. In order to be a medium of exchange, money must hold its value over
time; that is, it must be a store of value. If money could not be stored for some
period of time and still remain valuable in exchange, it would not solve the double
coincidence of wants problem and therefore would not be adopted as a medium of
exchange. As a store of value, money is not unique; many other stores of value exist,
such as land, works of art, and even baseball cards and stamps. Money may not even be
the best store of value because it depreciates with inflation. However, money is more
liquid than most other stores of value because as a medium of exchange, it is
readily accepted everywhere. Furthermore, money is an easily transported store of value
that is available in a number of convenient denominations.
Unit of account. Money also functions as a unit of account, providing a
common measure of the value of goods and services being exchanged. Knowing
the value or price of a good, in terms of money, enables both the supplier and the
purchaser of the good to make decisions about how much of the good to supply and
how much of the good to purchase.
1.2
Why did monetary authorities in South Africa decide to adopt inflation targeting? (3)
ECS3701 EXAM PACK
William Scott
Ranga: 0618441387
June 2020-November 2016
:
+
2
7
6
8
0
7
7
,Ranga: 0618441387
9
ECS3701: MONETARY ECONOMICS
MAY/JUNE 2020 EXAM MEMO
RANGA: 0618441387
ANSWER ALL THE QUESTIONS
Question 1 [20 marks]
1.1
Explain in detail why money is useful and how it facilitates exchange. (6)
Money is any item or verifiable record that is generally accepted as payment for goods
and services and repayment of debts, such as taxes, in a particular country or socio-
economic context. It is a liquid asset used in the settlement of transactions. It functions
based on the general acceptance of its value within a governmental economy and
internationally through foreign exchange. The current value of monetary currency is
not necessarily derived from the materials used to produce the note or coin.
Money is often defined in terms of the three functions or services that it provides.
Money serves as a medium of exchange, as a store of value, and as a unit of account.
Medium of exchange. Money's most important function is as a medium of exchange
to facilitate transactions. Without money, all transactions would have to be conducted by
,Ranga: 0618441387
barter, which involves direct exchange of one good or
, Ranga: 0618441387
service for another. The difficulty with a barter system is that in order to obtain a
particular good or service from a supplier, one has to possess a good or service of
equal value, which the supplier also desires. In other words, in a barter system,
exchange can take place only if there is a double coincidence of wants between two
transacting parties. The likelihood of a double coincidence of wants, however, is
small and makes the exchange of goods and services rather difficult. Money
effectively eliminates the double coincidence of wants problem by serving as a
medium of exchange that is accepted in all transactions, by all parties, regardless of
whether they desire each others' goods and services.
Store of value. In order to be a medium of exchange, money must hold its value over
time; that is, it must be a store of value. If money could not be stored for some
period of time and still remain valuable in exchange, it would not solve the double
coincidence of wants problem and therefore would not be adopted as a medium of
exchange. As a store of value, money is not unique; many other stores of value exist,
such as land, works of art, and even baseball cards and stamps. Money may not even be
the best store of value because it depreciates with inflation. However, money is more
liquid than most other stores of value because as a medium of exchange, it is
readily accepted everywhere. Furthermore, money is an easily transported store of value
that is available in a number of convenient denominations.
Unit of account. Money also functions as a unit of account, providing a
common measure of the value of goods and services being exchanged. Knowing
the value or price of a good, in terms of money, enables both the supplier and the
purchaser of the good to make decisions about how much of the good to supply and
how much of the good to purchase.
1.2
Why did monetary authorities in South Africa decide to adopt inflation targeting? (3)
