Topic:

1.     What are advantages of token money over commodity money?

Firstly, we need understand definition of token money and commodity money. Token money is a means of payment whose value or purchasing power as money greatly exceeds its cost of production or value in use other than as money. Commodity money is a useful good that serves as a medium of exchange.

Secondly, advantages of token money over commodity money. Token money has many advantages compared with commodity money.

The value of commodity money is a about equal to the value of the material contained in it. The principal materials used for this type of money have been gold, silver and copper. To use commodity money society must either cut back on other uses of that commodity or devote scares resources to producing additional quantities of the commodity. But there are less expensive ways for society to produce money.

A token money is a means of payment whose value on purchasing power as money greatly exceeds its cost of production or value in uses other than as money. The essential condition for the survival of token money is the restriction of the right to supply it. Private production is illegal society enforces the use of token money by making it legal tender. The law says it must be accepted as a mean of payment.

       2. What are functions of money?

Money is one of the man’s greatest inventions an essential tool of civilization. Money is any medium of exchange that is widely accepted in payment for goods and services or settlement of debts. There are 4 general functions of money.

Money as a medium of exchange

Money as a measure of value

Money as a store of value

Money as a standard of deferred payments

Money, the medium of exchange is used in one-half of almost all exchange labor services for money. People buy and/ or sell goods in exchange for money.

Money can also serve as a measure /standard of value. Society considers it convenient to use a monetary unit to determine relative’s costs of different goods and services.

Money is a store of value because it can be used to make purchase in future. But money can become worthless because it real purchasing power is eroded by inflation that is why stamp collections and interest- bearing bank account all serve as a store of value and can be exchanged to money.

Finally, money can be used as a standard of deferred payment. When you buy something but do not pay for it immediately, your payment is expressed in terms of money to be paid in the future.

 6. How can commercial banks create money? 

Commercial bank is a business in which the main product offered for sale is money.

The incentive in commercial banking is to earn profits. As for the case of commercial banking, a substantial amount of the businesses of commercial banks comes from loans made to businesses. When a business firm borrows a sum of money, the bank places it on the deposit in the firm’s checking account. The business with draws the money as it needs it. Banks create money by loaning out money that was deposited with them. For example:

Andy deposits 100$ at the bank. The banks loan out 80$ to bill. The amount of the 100$ that the bank received as a deposit which can be loaned out depends on the required reserve ratio as set by the Fed

At this point, Andy has 100$ and Bill has 80$ in purchasing power. So the money supply has essentially increased from 100$ to 180$, thus “creating” money.

Further money creation can be achieved if Bill went to a bank and deposited his 80$, then that bank could (assuming the required reserve ration is 20%) loan out 64$ to lard.

7. What are roles and functions of international financial institutions in the world economy?

International institutions include World Bank, international Monetary Fund (IMF), the IFC and the IDA and the Group of Seven (g7). The purposes of these institutions were to help restore the war ravaged nations, aid under-developed nations, assist in stabilizing exchange rates, and facilitate trade by allowing nations to borrow currencies needed to pay for imports.

The World Bank is created in 1944, in Breton Wood, New Hampshire; its headquarters is in Washington D.C. Finance projects in transportation, education, healthcare …Help strengthen private industry

Lending to members of IME only the government offices, agencies or business guarantees by the member governments.

There are requirements for borrowers, Ability to service the loans and show impossibility of others source of finance.

 IME created in 1944.

Membership is not free. Contribution of some percentage of what they will borrow

Supervise a system of fail exchange rate

The aim is to provide assistance to countries facing economic shocks.

One of the main good is to increase 4e world’s economic growth rate and cooperation

Borrowers must agree to any economic reforms as demanded by IME