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Chapter 3: Q.9 (page 110)

Why were people in the United States in the nineteenth century sometimes willing to be paid by check rather than with gold, even though they knew there was a possibility that the check might bounce?

Short Answer

Expert verified

People will accept checks due to lower transaction costs.

Step by step solution

01

Step 1. Introduction

Money is something that is used as a medium to make exchange in economic transactions. Apart from acting as a medium in facilitating trade, money serves other purposes such as acting as store of value.

02

Step 2. Explanation

People who would prefer to be paid by check rather than gold since checks were easier to transport than gold. People would frequently choose to be paid by check even if the check would bounce. In other words, people were more inclined to accept checks because of the lower transaction costs.

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Most popular questions from this chapter

Explain the concept of liquidity.

Rank the following assets from most liquid to least liquid:

a. Land

b. The inventory of a merchandiser

c. Cash in hand

d. A savings account at a local bank

e. A one-year bond

f. Ordinary shares

Which of the Federal Reserve’s measures of the monetary aggregates—M1 or M2—is composed of the most liquid assets? Which is the larger measure?

In prison, cigarettes are sometimes used among inmates as a form of payment. How is it possible for cigarettes to solve the “double coincidence of wants” problem, even if a prisoner does not smoke?

Go to the St. Louis Federal Reserve FRED database, and find data on currency (CURRSL), traveler’s checks (TVCKSSL), demand deposits (DEMDEPSL), and other checkable deposits (OCDSL). Calculate the M1 money supply, and calculate the percentage change in M1 and in each of the four components of M1 from the most recent month of data available to the same time one year prior. Which component has the highest growth rate? The lowest growth rate? Repeat the calculations using the data from January 2000 to the most recent month of data available, and compare your results.

Three goods are produced in an economy by three individuals: Good Producer Apples Orchard owner Bananas Banana grower Chocolate Chocolatier If the orchard owner likes only bananas, the banana grower likes only chocolate, and the 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?
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