Principles of Economics- Mankiw (5th) 591

Principles of Economics- Mankiw (5th) 591 - CHAPTER 27 T H...

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CHAPTER 27 THE MONETARY SYSTEM 611 Another example of commodity money is cigarettes. In prisoner-of-war camps during World War II, prisoners traded goods and services with one another using cigarettes as the store of value, unit of account, and medium of exchange. Simi- larly, as the Soviet Union was breaking up in the late 1980s, cigarettes started re- placing the ruble as the preferred currency in Moscow. In both cases, even nonsmokers were happy to accept cigarettes in an exchange, knowing that they could use the cigarettes to buy other goods and services. Money without intrinsic value is called fiat money. A fiat is simply an order or decree, and fiat money is established as money by government decree. For exam- ple, compare the paper dollars in your wallet (printed by the U.S. government) and the paper dollars from a game of Monopoly (printed by the Parker Brothers game company). Why can you use the first to pay your bill at a restaurant but not the second? The answer is that the U.S. government has decreed its dollars to be
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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