In modern society, the majority of the population only accepts money (Coins, Paper, Checks, etc.) as means of exchange for goods and services. Typically, they are certain that the funds received will retain their current value until they are ready to use it in exchange elsewhere. If we look at runaway inflation in the thousands/tens of thousands percent in a given year, people would tend to revert to a bartering system. (E.g. one chicken for X hours of labor)Money as a unit of account for conveying price – When we experience drastic inflation, we see that its effect greatly reduces the use of money as a means to measure value. Simply, it would bephysically impossible to rapidly adjust all prices and align them with their relative values. This creates a situation where some see an opportunity to take advantage and profit at the expense of those that are less educated/fortunate. The end result will be that the less fortunate will lose trust in money being used as a measure of value and move to an alternate solution. Money as a store of value – Money’s usefulness as a store of value is destroyed in drastic inflation. To help with this scenario, we can utilize the “Rule of 70”. If we divide the absolute inflation rate into 70, we can produce and estimation of how long it would take a person’s dollar savings to diminish their purchase power by almost half. So by applying 7% inflation, the value of the dollar would only be worth half as much in ten years.
Question 35.Which of the following are included in this year’s GDP? Explain your answer in each case.A.The services of a commercial painter in painting the family home.B.An auto dealer’s sale of a new car to a nonbusiness customer.C.The money received by Smith when she sells her biology textbook to a used-book buyer. D.The publication and sale of a new economics textbook.E.A $2 billion increase in business inventories.F.Government purchases of newly produced aircraft.