Question

Gold and cigarettes can function as money for transactions (a medium of exchange.)  

a) What characteristics of gold and cigarettes make them well suited to serve as a medium of exchange or limit their suitability for serving as a medium of exchange? Explain. Be specific. (7-11 sentences)

b) Are gold and cigarettes commodity or fiat money? Are US dollars commodity or fiat money? Explain. (3-5 sentences)

Answer 1

a) the following characteristics make gold and cigarettes well-suited to serve as a medium of exchange.

1. Both gold and cigarettes are portable which makes them a good medium of exchange.
2. Both gold and cigarettes have commodity value or utility value.
3. Moreover both have stability of value characteristic of good medium of exchange.

b) commodity money is that money which has commodity value that is if the money is not used as money and used as a commodity it will give satisfaction.

Fiat money on the other hand does not have commodity value. It means that it cannot be used as a commodity.

Both gold and cigarettes therefore are commodity money.

US dollar on the other hand does not have any commodity value that is the dollar itself cannot give any utility. Therefore, US dollar is fiat money.