4. Consider the following two economies, each of which has three people, Je, Wal

Question

4.   Consider the following two economies, each of which has three people, Je, Walter, and Maude. Below is a description of each economy, including the current resources and prefer-ences of each person:
•   Economy 1: Je wants Rugs and has Bowling Balls; Walter wants Folger’s cans and has Rugs; Maude wants Bowling Balls and has Folger’s cans.
•   Economy 2: Je wants Rugs and has half and half; Walter wants nail polish and has Rugs; Maude wants half and half and has Rugs.

In each economy, describe what functions money can potentially serve to improve the func-tioning of the economy. Does one economy benet more from having money than another (i.e. does money serve more functions in one economy relative to the other)? Explain and justify your answer.

Explanation / Answer

In economy 1 if we employ barter terms of trade, Jeff could exchange his bowling balls with Walter for rugs.Thus he gets rugs while Walter gets bowling balls.Walter however wants folger's cans, hence he can exchange his bowling balls with Maude who wants bowling balls and has folger's cans.

Money if used in this economy people need not find each other and thus save the search costs, and can directly get what they want through use of money.

In economy 2 Jeff and Maude can get whatever they want by entering into an exchange contract with each other.However Walter wants nail polish which noone in the economy posseses .Thus Walter has no choice but to use something valuable that is legally accepted in the economy to exchange for nail polish.This legally acceptable valuable thing can be served by money.Thus money is serving economy 2 more than economy 1 as in economy 1 people can do without money also , however in economy2 money is essential.

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