Question

There are three types of money: commodity money, commodity-backed money, and fiat money. Which type of money is used in each of the following situations? a. Bottles of rum were used to pay for goods in colonial Australia. b. Salt was used in many European countries as a medium of exchange. c. For a brief time, Germany used paper money (the "Rye Mark") that could be redeemed for a certain amount of rye, a type of grain. d. The town of Ithaca, New York, prints its own currency, the Ithaca HOURS, which can be used to purchase local goods and services.

Short answer

Question: Identify the type of money being used in each of the following situations: a. Bottles of rum were used to pay for goods in colonial Australia. b. Salt was used in many European countries as a medium of exchange. c. For a brief time, Germany used paper money (the "Rye Mark") that could be redeemed for a certain amount of rye, a type of grain. d. The town of Ithaca, New York, prints its own currency, the Ithaca HOURS, which can be used to purchase local goods and services. Answer: a. Commodity Money b. Commodity Money c. Commodity-Backed Money d. Fiat Money

Step-by-step solution

Understanding the types of money

First, let's understand the definition and characteristics of each type of money: 1. Commodity money: Money that has an intrinsic value and can be used both as a medium of exchange and for its own use. Examples include gold, silver, and even livestock. 2. Commodity-backed money: A type of money that is backed by a commodity, such as gold or silver. This means that the person holding the money can redeem it for the commodity at a fixed rate. It can no longer be used for its own use. 3. Fiat money: A type of money that has no intrinsic value and is not backed by any commodity. It is used as a medium of exchange based on the faith and credit of the economy. Examples include most modern currencies, such as the US Dollar or Euro.

Identifying the type of money in each situation

a. Bottles of rum were used to pay for goods in colonial Australia: In this situation, the bottles of rum have their own value (they can be consumed), and they are also used as a medium of exchange. Therefore, this is an example of commodity money. Answer: Commodity Money b. Salt was used in many European countries as a medium of exchange: Here, salt has intrinsic value (it can be used for its own purposes, such as preserving food), and it is also being used as a medium of exchange. This situation represents commodity money. Answer: Commodity Money c. For a brief time, Germany used paper money (the "Rye Mark") that could be redeemed for a certain amount of rye, a type of grain: This paper money is backed by a commodity (rye), which means that the holder can redeem it for rye at a fixed rate. The money itself has no intrinsic value, so this is an example of commodity-backed money. Answer: Commodity-Backed Money d. The town of Ithaca, New York, prints its own currency, the Ithaca HOURS, which can be used to purchase local goods and services: In this case, the Ithaca HOURS are not backed by a commodity, and they have no intrinsic value. They are used as a medium of exchange based on the faith and credit of the local economy. This situation represents fiat money. Answer: Fiat Money