Question

Define each concept in your own words, and give specific examples of each of the following:

a. Barter, commodity money, fiat money, stock, and bonds

b. The reserve requirement

c. Fiscal policy and monetary policy

Answer 1

a. Barter meankng exchanged of goods or services without using money as amedium of exchange. For ex- Bartering rice in exchange of fruits, or Bartering the physical labour in exachange of clothes etc.

Commodity Money- Is the money who derives value from which it is made of For example Gold coin dervives value from being made of Gold rather than the arbitrary value put down on yhe currency notes

Fiat Money- Fiat money is the money which we use as legal tender now and dervies value from Government order

Stocks These are securities which represents the percentage of ownership in a corporation For example holding stock of Microsoft represents you are part owner of Microsoft with ownership depends upon the share you own vs total share issued

Bonds- Bonds are tool used by institutions/corporation to raise money with bond issuer is indebted to the bond holder.

b. Reserve requirement- Is the monetary policy tool which mandates the Bank to hold certain percentage of their deposits as mandated by central bank in form of liquid reserves i.e. cash raising reserve requirement is a contractionary monetary policy as this removes liquiy out of banks hand where as lowering reserve requirements is expansionary

c. Fiscal Policy- Is the tool used by the government through spending or Taxation policy to affect the economy activity in the country's nd thereby controlling employment and price level. Tax increase is contractionary and higher government spending is expansionary or vice versa

Monetary Policy is the policy imposed by central bank of the nation to control money supply into the economy with an objective to control price and low unemployment rate