Short Answers





Short Answers

Question One

a) Fiat money is a currency system whose value is not quantified by paper. It is generated by a government through controlling the laws of a country. The system is mostly characterized by the achievements of companies in a country. Fiat money could take the form of paper, but its value requires the backing of special jewelry or metal. On the other hand, paper money is a form of bill whose value is agreed upon by law and is used as a means of doing financial transactions.

b)         Gold standard is a method of accounting for the value of money through relating the amount to a specified quantity of the metal. The system has the advantage of not changing the value of money rapidly to affect the holder. However, gold standards have the disadvantage of oppressing low and middle class citizens and companies because they restrict them from printing money. Because of the expensive nature of gold, most citizens cannot afford it. The current system incorporates the use of paper money. Paper currency has the advantage of being less bulky as compared to fiat money due to the nature of the weight of gold. However, it has the disadvantage of reducing the economy of a country because it is easily affected by inflation.

Question Two

Dollarization is a method through which a country employs the use of a foreign nation’s currency as opposed to its own in order to conduct trade. The common disadvantage of dollarization, currency union and gold standard monetary systems is that a country loses control of its own economy. In dollarization, a country is dependent on foreign currency. As such, it is unable to produce its own currency. As a result, the country is affected by inflation of the foreign nation due to its heavy reliance on overseas currency.

            A currency union is a monetary system that is shared between two or more countries. This system links countries such that the inflation of one nation has the same effects on the other. This hinders countries from self-economic development. Gold standards also tie down countries that do not produce it by making harsh policies that do not favor other nations. This makes them suffer from slowed economic development because exchanging money for gold in most countries is difficult.

Question Three

a)The loanable funds theory relates the value of interests gained by a company or firm to the demand and supply of loans. Changes in interest rates occur when the demand and supply of loanable funds increases or reduces. According to Ben Bernanke’s argument, America is faced by extremely low levels of interest rates. This could possibly be because of the reduced demand of loanable funds. When the demand of these funds reduces, companies are unable to maximize on interest because no money will be borrowed in order to generate added returns. Therefore, many companies have reduced the interest rates in order to increase the level of borrowing funds. The variable responsible for shifting the curve is the supply of loanable funds. A shift to the right increases the supply of loanable funds. This implies that the interest rates will be lowered to increase demand. The criteria for issuing loanable funds should be revised to enhance the level of demand.

b) Public debt is the money owed by a country’s government. The fluctuations in gross domestic product (GDP) of Greece explain the rise in public debt of the country. The rise in public debt of Greece has led to an increase of interest rates in the country. This is because the government struggles to generate funds to compensate for the rising public debts. The increase in interest rates has led to a reduction in the demand of loanable funds. As such, payment of the loans has become a burden to borrowers due to the extreme interest rates. As a result, the supply of these loans has also reduced because of lack of borrowing. Rising public debts shifts the supply-demand curve to the left meaning that there will be a reduction in the demand of loanable funds. This implies that there will be an increase of the interest rates.

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