Paper currency is the most easily recognized form of money. How well does paper currency serve the functions of money if we have an inflation rate of 50-percent per year?
b)
Gold is also recognized as a form of money. How well does gold serve the functions of money if we have an inflation rate of 50-percent
To evaluate how well paper currency and gold serve as money in a high inflation rate scenario, we need to consider the functions of money and how these assets fulfill those functions.
The functions of money are generally accepted as being a medium of exchange, a unit of account, and a store of value. Let's look at paper currency and gold individually in relation to these functions:
1. Paper Currency:
a) Medium of Exchange: Paper currency is widely recognized and accepted by people for exchanging goods and services. However, with a high inflation rate of 50 percent per year, the value of paper currency rapidly decreases, which can lead to uncertainty and reluctance in its acceptance as a medium of exchange.
b) Unit of Account: Paper currency is commonly used as a unit of account to measure and compare the value of goods and services. However, in a high inflation environment, the value of paper currency is eroded, making it harder to accurately measure the real value of goods and services in terms of currency.
c) Store of Value: Paper currency's ability to serve as a store of value diminishes in high inflation scenarios. When the inflation rate is 50 percent per year, the value of paper currency declines significantly over time, making it a poor choice for storing wealth as its real value rapidly decreases.
2. Gold:
a) Medium of Exchange: Gold has historically been recognized as a medium of exchange due to its rarity, durability, and universal acceptance. However, in a scenario with a high inflation rate of 50 percent per year, gold might not be a practical medium of exchange due to the logistical challenges of using physical gold in everyday transactions.
b) Unit of Account: Gold can serve as a relatively stable unit of account since its physical supply is limited and it has inherent value. However, in a high inflation environment, the value of gold may also fluctuate significantly, which can affect its accuracy as a unit of account.
c) Store of Value: Gold is often considered a reliable store of value because it retains its inherent worth over time. In a scenario with a high inflation rate of 50 percent per year, gold can be an effective hedge against inflation since its value tends to rise during inflationary periods.
In conclusion, paper currency and gold both face challenges in serving as money in a high inflation environment. Paper currency loses its value rapidly and becomes less reliable as a medium of exchange, unit of account, and store of value. Gold, although potentially more stable, may still face challenges in serving as a practical medium of exchange and accurate unit of account. However, gold has historically been seen as a more effective store of value during inflationary periods.