Barter System & Money

1 Mark Questions

1. State the components of money supply. (Delhi 2013, 2010)

or What is included in money supply? (Delhi 2011c) or Name the two components of money supply. (All India 2010)

Ans. The following are included in money supply:

1. Currency notes held by public
2. Demand deposits of commercial banks
3. Define money supply. (Delhi 2011, 2010c)

Ans. The total stock of money in circulation among the public at a particular point of time is called money supply.

1. Define money. (All India 2011)

or Give the meaning of money. (All India 2010)

Ans. Money is defined as a thing or object that is commonly accepted as a medium of exchange. It is an intermediate good which is acceptable to both the parties i.e. buyers and sellers.

3 Marks Questions

1. Explain the significance of the unit of account function of money. (All India 2014)

Ans. Money serves as a unit of value or common measure of value in terms of which the value of all goods and services are measured. This helps in measuring the exchange values of commodities. The prices of all the goods and services can be fixed in terms of money and the problem of expressing of the value of each commodity in terms of quantities of other goods can be avoided. This function of money makes it possible to keep business accounts. It would not be possible to keep business account unless all business transaction are expressed in terms of money.

1. Explain the significance of the store of value function of money. (Delhi 2014,2012; Compartment 2014)

Ans. Significance of store of value as a function of money are:

1. The money is an asset that retains value over time provided price remains constant.

The public stores their wealth in the form of money.

1. People can hold wealth in the form of money as it has general acceptability.
2. It promotes capital formation by the way of new investment.

6. Explain the standard of deferred payment function of money. (All India 2014, 2012)

Ans. Money simplifies the mechanism of deferred payments by a great deal. Deferred payments means future payment. When we take a loan from somebody, we not only pay the principal amount but also the interest amount. Under barter system of exchange, it was very difficult to make such transactions. As money maintains a standard value over a period of time provided price remains constant deferred payments can be easily done.

1. Explain the store of value as function of money. (Foreign 2014; All India 2009)

Ans. Money is an asset that retains its value over time. People store their wealth in the form of money. Money overcomes the problem of storing perishable item under barter system of exchange. With money, people hold liquidity and value in a much more convenient manner.

8. Explain the significance of medium of exchange function of money. (Delhi 2014)

or Explain the medium of exchange function of money. (All India 2013; Delhi 2009c) Ans. The primary function of money is, acting as a medium of exchange between two parties involved in a transaction. It avoids the practical problems of wastage of time and resources, involved in the barter system of an exchange and it improves the transactional efficiency. It also promotes allocational efficiency in the trade and production of goods and services. Hence, it can be said that money was Seprated the acts of sales and purchases.

1. Explain the problem of double coincidence of wants faced under barter system.

How has money solved it? (Delhi 2013)

Ans. Double coincidence of wants: Barter system can only work, when both the persons are ready to exchange each other's goods i.e. person A should have the good person B wanted and vice-versa. But usually this type of double coincidence is rare, especially in modern times.

Money eliminates double coincidence of wants: In modern times, the buyer exchanges goods for money, the seller exchanges goods for money due to common measure of value function of money, It facilitates an exchanges of goods and services and helps in carrying on trade smoothly.

10. Explain the evolution of money. (All India 2008)

Ans. Money find its origin to facilitate the need of exchange. Earlier under barter system people were dependend on each other to satisfy their wants. Barter system had many