Barter System & Money

1 Mark Questions

1. State the components of money supply. (Delhi 2013, 2010)

or
What is included in money supply? (Delhi 2011c)
or
Name the two components of money supply. (All India 2010)

Ans. The following are included in money supply:

(i) Currency notes held by public
(ii) Demand deposits of commercial banks

2. Define money supply. (Delhi 2011, 2010c)

Ans. The total stock of money in circulation among the public at a particular point of
time is called money supply.

3. Define money. (All India 2011)

or
Give the meaning of money. (All India 2010)

Ans. Money is defined as a thing or object that is commonly accepted as a medium of

exchange. It is an intermediate good which is acceptable to both the parties i.e. buyers
and sellers.

3 Marks Questions

4. Explain the significance of the unit of account function of money. (All India
2014)
Ans. Money serves as a unit of value or common measure of value in terms of which
the value of all goods and services are measured. This helps in measuring the
exchange values of commodities. The prices of all the goods and services can be fixed
in terms of money and the problem of expressing of the value of each commodity in
terms of quantities of other goods can be avoided. This function of money makes it
possible to keep business accounts. It would not be possible to keep business account
unless all business transaction are expressed in terms of money.

5. Explain the significance of the store of value function of money. (Delhi

2014,2012; Compartment 2014)
Ans. Significance of store of value as a function of money are:
(i) The money is an asset that retains value over time provided price remains constant.
The public stores their wealth in the form of money.
(ii) People can hold wealth in the form of money as it has general acceptability.
(iii) It promotes capital formation by the way of new investment.

6. Explain the standard of deferred payment function of money. (All India 2014,
2012)
Ans. Money simplifies the mechanism of deferred payments by a great deal. Deferred
payments means future payment. When we take a loan from somebody, we not only
pay the principal amount but also the interest amount. Under barter system of
exchange, it was very difficult to make such transactions. As money maintains a
standard value over a period of time provided price remains constant deferred
payments can be easily done.

7. Explain the store of value as function of money. (Foreign 2014; All India 2009)
Ans. Money is an asset that retains its value over time. People store their wealth in the
form of money. Money overcomes the problem of storing perishable item under barter
system of exchange. With money, people hold liquidity and value in a much more
convenient manner.

8. Explain the significance of medium of exchange function of money. (Delhi

2014)
or
Explain the medium of exchange function of money. (All India 2013; Delhi 2009c)
Ans. The primary function of money is, acting as a medium of exchange between two
parties involved in a transaction. It avoids the practical problems of wastage of time and
resources, involved in the barter system of an exchange and it improves the
transactional efficiency. It also promotes allocational efficiency in the trade and
production of goods and services. Hence, it can be said that money was Seprated the
acts of sales and purchases.

9. Explain the problem of double coincidence of wants faced under barter system.
How has money solved it? (Delhi 2013)

Ans. Double coincidence of wants: Barter system can only work, when both the
persons are ready to exchange each other’s goods i.e. person A should have the good
person B wanted and vice-versa. But usually this type of double coincidence is rare,
especially in modern times.
Money eliminates double coincidence of wants: In modern times, the buyer
exchanges goods for money, the seller exchanges goods for money due to common
measure of value function of money, It facilitates an exchanges of goods and services
and helps in carrying on trade smoothly.

10. Explain the evolution of money. (All India 2008)

Ans. Money find its origin to facilitate the need of exchange. Earlier under barter system
people were dependend on each other to satisfy their wants. Barter system had many
problems in itself. Money has over all those problems and hence, accepted as a
medium of exchange. Money has also over come the problem of double coincidence of
wants and lack of common measure of value.

4 Marks Questions

11. Define money supply and explain its components. (Foreign 2014)
Ans. The total stock of money in circulation among the public at a particular point of
time is called money supply. Money supply, like money demand, is a stock variable.

Where, CU is currency (notes plus coins) held by the public and DD is net demand
deposits held by commercial banks. The word ‘net’ implies that only deposits of the
public held by the banks are to be included in money supply. The interbank deposits,
which a commercial banks, are not to be regarded as part of money supply.

12. How does money overcome the problems of barter system? Explain
briefly. (All India 2011)

Ans. Money overcomes the problem of barter system by replacing the C-C economy
with monetary economy
(i) In a barter system, there was a problem of double coincidence of wants. It is very
difficult to match the expectations of two different individuals. Thus, money was
envolved to overcome the problem of coincidence of wants. As it is very difficult to find
two person having goods needed by the other person in the barter system of exchange.
(ii) When there was no money, it was difficult to give common unit of value to measure
goods or commodities but when money is evoluted, it gives a common unit of amount to
every goods and commodities.
(iii) Money facilitates the contractual and future payments i.e. deferred payments which,
were very difficult at the time of barter system.
(iv) Money is also a legal tender which has a general acceptance which was not the
case under barter system.

13. State four functions of money. Explain any one of them. (Delhi 2009)
Ans. Following are the four functions of money:
(i) It acts as a medium of exchange.
(ii) It is a common unit of account.
(iii) Money acts as a store of value.
(iv) It is a standard of deferred payment.
Money as a medium of exchange: The primary function of money is, acting as a
medium of exchange between two parties involved in a transaction. It avoids the
practical problems of wastage of time and resources, involved in the barter system of an
exchange and it improves the transactional efficiency. It also promotes allocational
efficiency in the trade and production of goods and services. Hence, it can be said that
money was Seprated the acts of sales and purchases.

14. Explain any two functions of money. (Delhi 2009; All India 2008)
Ans. (i) Standard of deferred payment: Money simplifies the mechanism of deferred
payments by a great deal. Deferred payments means future payment. When we take a
loan from somebody, we not only pay the principal amount but also the interest amount.
Under barter system of exchange, it was very difficult to make such transactions. As
money maintains a standard value over a period of time provided price remains
constant deferred payments can be easily done.
(ii) Store of value: Money is an asset that retains its value over time. People store their
wealth in the form of money. Money overcomes the problem of storing perishable item
under barter system of exchange. With money, people hold liquidity and value in a
much more convenient manner.

15. Describe the evolution of money. (All India 2009)

Ans.Evolution of money: Money find its origin to facilitate the need of exchange.
Earlier under barter system people were dependend on each other to satisfy their
wants. Barter system had many problems in itself. Money has over all those problems
and hence, accepted as a medium of exchange. Money has also over come the
problem of double coincidence of wants and lack of common measure of value.
There are mainly six stages of evolution of money, that are as follow:
(i) Use of animals such as cow, sheep for exchange.
(ii) Use of commodities such as rice, wheat, cotton for exchange.
(iii) Use of metals such as gold, silver, brass for exchange.
(iv) Use of currency notes and coins.
(v) Use of cheques, drafts, bill of exchange, bonds, etc as money. ‘
(vi) Use of credit and debits cards for exchange.

16. State the functions of money. (Delhi 2008C)

Ans. The following are the functions of money
(i) Unit of account: Money acts as a common denominator in terms of which the value
of all the commodities are expressed. The price and value of a commodity is quoted in
terms of money. This function of money helps to compare the value of commodities and
calculate the rate of exchange between two goods or services.
(ii) Medium of exchange :The primary function of money is, acting as a medium of
exchange between two parties involved in a transaction. It avoids the practical problems
of wastage of time and resources, involved in the barter system of an exchange and it
improves the transactional efficiency. It also promotes allocational efficiency in the trade
and production of goods and services. Hence, it can be said that money was Seprated
the acts of sales and purchases.

(iii) Standard of deferred payments: Money simplifies the mechanism of deferred

payments by a great deal. Deferred payments means future payment. When we take a
loan from somebody, we not only pay the principal amount but also the interest amount.
Under barter system of exchange, it was very difficult to make such transactions. As
money maintains a standard value over a period of time provided price remains
constant deferred payments can be easily done.

(iv) Store of value: Money is an asset that retains its value over time. People store
their wealth in the form of money. Money overcomes the problem of storing perishable
item under barter system of exchange. With money, people hold liquidity and value in a
much more convenient manner.