Hwk2_sol - Economics 345 Fall 2008 Prof Irina Telyukova Homework Assignment 2 SOLUTIONS 1 Mishkin and Serletis 3d ed chapter 3 p 57 questions 2 3 7

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Economics 345 Fall 2008 Prof. Irina Telyukova Homework Assignment 2 SOLUTIONS 1. Mishkin and Serletis, 3d ed, chapter 3, p. 57, questions 2, 3, 7, 8, 10 (2) Here is a better (more correct) answer than the one in the book: A lot actually depends on what you assume about the barter problem. If you allow people to trade for more than 1 period (more than 1 time, that is), then a form of barter is possible; but if you assume that exchange has to happen in a single trade, then it won’t happen here. Denote apples by A, bananas by B, and chocolate by C. We have A-producer likes B, B-producer likes C, and C-producer likes A. The following diagram helps: A B C B C A If we had to barter in 1 period, note that the trades would not be possible: A- producer could give his apples to the C-producer, but he does NOT want chocolate (C ) in return – he wants B instead. So a direct trade between the chocolate guy and the apple guy is not possible. The same goes for all other possible pairs of trades between the two: one likes the other’s good, but the other does not like the good offered in exchange. We call this a single coincidence of wants – a lack of double-coincidence of wants, required for successful trade. However, suppose that we could allow barter in 2 periods. Here’s one possibility: A and C trade – A gets C, C gets A. C likes A, so he eats the apples and is happy; he is done. Now A has C, and in period 2, he trades with B – B gives him bananas, he gives B chocolate, and both are now happy (see diagram below). Observe the following –in this scenario, C (chocolate) became a commodity money – A accepted C not because he likes it, but because he knows he can use it in trade going forward, that is, he can use it as a medium of exchange! Notice also that this is not the only possible scenario – see if you can figure out the other trades in which an object is used as commodity money for a period. A C B B C A C A B C Step 1 Step 2
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For those who are interested, we have just described a relatively rudimentary economic model of how money arises in an economy, and this idea, formalized in a rigorous economic model, was published as an academic paper almost 20 years ago (Kiyotaki and Wright, 1989, Journal of Political Economy), and started off an entire monetary theory literature.
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This note was uploaded on 06/21/2011 for the course ECON 345 taught by Professor Sumaila during the Spring '09 term at The University of British Columbia.

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Hwk2_sol - Economics 345 Fall 2008 Prof Irina Telyukova Homework Assignment 2 SOLUTIONS 1 Mishkin and Serletis 3d ed chapter 3 p 57 questions 2 3 7

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