Principles of Economics- Mankiw (5th) 588

Principles of Economics- Mankiw (5th) 588 - 608 PA R T T E...

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608 PART TEN MONEY AND PRICES IN THE LONG RUN The social custom of using money for transactions is extraordinarily useful in a large, complex society. Imagine, for a moment, that there was no item in the economy widely accepted in exchange for goods and services. People would have to rely on barter —the exchange of one good or service for another—to obtain the things they need. To get your restaurant meal, for instance, you would have to offer the restaurateur something of immediate value. You could offer to wash some dishes, clean his car, or give him your family’s secret recipe for meat loaf. An economy that relies on barter will have trouble allocating its scarce resources efficiently. In such an economy, trade is said to require the double coincidence of wants —the unlikely occurrence that two people each have a good or service that the other wants. The existence of money makes trade easier. The restaurateur does not care whether you can produce a valuable good or service for him. He is happy to accept
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