Properties of money and currency valuation
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Answer the following questions with reference to the attached case studies.
1. How well do mackerel satisfy the six properties of ideal money (durable, portable, divisible, uniform quality, low opportunity cost, stable value)?
2. In countries where the monetary system has broken down , what are some alternatives to which people have resorted to carry out exchange?
3. The Big Mac Index computed by The Economist magazine has consistently found the U.S. dollar to be undervalued against some currencies and overvalued against others. This finding seems to call for a rejection of the purchasing power parity theory. Explain why this index may not be a valid test of the theory.
4. Why would China want its own currency to be undervalued relative to the U.S. dollar? How does China maintain an undervalued currency?
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Solution Summary
The response provides you a structured explanation of the four case studies listed in attachments . It also gives you the relevant references.
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1. Money and the financial system: Mackerel Economics in Federal Prisons.
Pouches of mackerel do not satisfy the six properties of ideal money. First, they are not durable. The pouches have an expiry date after which they will become unfit for human consumption. Second, the pouches are not fully portable. They can be moved around in the prison but their weight will increase with larger amounts. Ten dollars will mean ten pouches of mackerel and a hundred dollars means a hundred pouches of mackerel. This will make the 'money' very heavy. Third, the pouches of mackerel are not divisible. If one wants fifty cents, the pouches of mackerel cannot be divided. Fourth, the property of uniform quality is not satisfied by pouches of mackerel (Ahamed Kameel, Mydin Meera, Moussa Larbani, 2006). The quality varies according to the expiry date on the pouch. Different sources of the pouch can also mean differences in quality. Fifth, low opportunity cost is not satisfied by pouches of mackerel. The contents of the pouches can be eaten if a prisoner wants more protein he may eat the mackerel. Sixth, the final quality is that of stable value. In the short run this quality is satisfied by pouches of mackerel. For a week or till expiry date the pouches have stable value but in the long run pouches of mackerel do not have stable value. The value deteriorates with time or damage to the pouches.
2. The Hassle of Change:
In countries where the monetary system has broken down, some alternatives to which people have resorted to carry out exchange include the digital gold currency, the Ithaca Hours, and the Liberty Dollar. In general when the monetary system breaks down fiat or ...
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- BSc , University of Calcutta
- MBA, Eastern Institute for Integrated Learning in Management
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