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Unformatted text preview: IS MONETARY EQUILIBRIUM OBLIGATORY? HAKAN YILMAZKUDAY Money has mainly three important features in an economy: medium of exchange, unit of account and store of value. As a medium of exchange, money is used for exchanging goods. To understand the importance of this feature, think of a worker of an automobile factory who can survive by consuming her monthly salary. Suppose that the owner/employer of the factory pays this salary in terms of automobile 1 . Then, this worker has to find other people who want to exchange their goods with the workers automobile. Here, the problem of double coincide of wants comes into picture. The worker cannot find such people all the time, or researching for such people can be a hard job 2 . Thus, there has to be another medium of exchange which is practical for exchanging in the economy without any doubt. This medium of exchange is money. As a unit of account, money is used for determining the relative values of goods. For illustration, consider the same factory worker above. If her monthly salary had been paid in terms of automobile, she would have to calculate every goods value in terms of automobile. Maybe this calculation may not seem to be such a hard work for just one person, but when we think of the overall economy, each individual would have to calculate the relative values of goods in terms of their monthly salary. This would result in a huge list of relative values. 1 An economy in which goods are purchased by other goods is known as barter economy. 2 According to Hahn (1988), double coincide of wants can be achieved by the help of middlemen who provide the information of who is willing to exchange what, or equivalently holding appropriate inventories so that agents know which middlemen can provide the goods which they want for the good which they wish to supply. Certainly middlemen exist but there are two points to be made: their services cannot be provided without cost (use of resources) and their services will be more cheaply provided if they also can exchange their goods for money. Is monetary equilibrium obligatory? As a store of value, money is used for saving. This feature of money is functional when the goods are perishable. This can be realized by our basic example above. Consider again that the workers salary is paid in terms of automobile. Moreover, for simplicity, suppose that the automobile can be separated into parts and these parts are saved for future consumption. The separation part can be accurate but the saving part is mistaken because of the perishable features of automobile, such as rusting or decaying. So far, all of the three features were considered in basic terms including essential assumptions. For instance, we claimed that money is an accurate medium of exchange relative to an automobile, but we cannot guarantee that money will be accepted by all individuals in the economy. Or, in the case of inflation foreign exchange can be used as a unit account while domestic currency is used as a medium...
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- Fall '11