Question

1.Can ice cream be money? Answer the question considering the three functions we discussed.

2. What does it mean “fiat money” and why the modern economies moved to this payments system?

3. What are the small denomination time deposits? Why are they in M2 and not in M1?

4. Calculate the deposit multiplier in the case of a reserve requirement of 15 percent.

5. What is the relation between the reserve requirement and the deposit multiplier? Discuss and provide one example.

Answer 1

Q1) No ice cream can not be money as it does not serve the 3 primary functions of money well.

The medium of exchange: Since there is a tremendous variety of ice creams available, it will be extremely difficult to know what people value more and how the price can be set in a transaction. Further in order to make a transaction, one needs to carry money. Ice cream can not be carried easily as it will melt and will have no value after that.

Unit of account: It is extremely difficult to divide ice cream into smaller units without losing value and hence, it can not serve as a unit of account.

Store of value: Storing ice cream is not easy at all as there is a high risk of the ice cream melting and after that, it will have no value. Thus, it can not sevre as a stroe of value.