Questions: Money: Fundamentals, Definition, and Characteristics

Question 1

A society uses large stone discs as money. The stones are difficult to move and cannot be divided into smaller pieces. Which characteristic of effective money do they most clearly fail?

• A. Durability
• B. Scarcity
• C. Portability and divisibility
• D. Store of value

Answer: (C)

Effective money must be both portable (easy to transport for exchange) and divisible (can represent different transaction sizes). Heavy, immovable stones fail portability badly and cannot be split to make change, failing divisibility. This combination makes them impractical as a medium of exchange despite being durable and scarce.

Question 2

A $20 bill has intrinsic value — it is worth $20 because the paper and ink it is made from cost $20 to produce.

• T. True
• F. False

Answer: False

Modern fiat currency has almost no intrinsic value — the paper and ink in a $20 bill cost only a few cents to produce. Its value comes entirely from collective trust: governments declare it legal tender, people accept it in exchange, and institutions treat it as valid. This is why hyperinflation can destroy a currency's value even when the physical bills still exist — trust collapses, not the paper.

Question 3

Explain why a society might abandon barter in favor of using a common money, even if the money itself (like paper) has no intrinsic value.

Model answer: Barter requires a double coincidence of wants — both parties must simultaneously have what the other wants. Money solves this by acting as a universal medium of exchange that separates the act of selling from the act of buying, making trade far more efficient.

In a barter economy, a farmer who wants shoes must find a shoemaker who wants food at exactly the same time. This is the 'double coincidence of wants' problem and severely limits trade. Money decouples these transactions: the farmer sells grain for money, then uses that money to buy shoes whenever convenient. The money's lack of intrinsic value is irrelevant as long as everyone trusts they can exchange it — which is exactly what government backing and social convention provide.