Chapter 14: Q3. (page 512)
Explain why a system of commodity-backed money uses resources more efficiently than a system of commodity money.
Short Answer
Expert verified
The commodity-backed money system uses resources more efficiently. It pegs the value of money to rare commodities or resources such as gold and silver instead of using these resources as money and depleting them.
Step by step solution
01
Commodity money
The commodity money is the money that was used when many countries, including the United States, were the British colonies. The commodity money was not regular paper money; simply commodities such as gold and silver were used to make transactions. In the regions where gold and silver were extremally rare, other commodities were used as money, such as Tabaco.
02
More efficient commodity-backed money
The commodity-backed money came into existence after the US civil war in America. This commodity-backed money is a paper note or a metal coin with more face value than its intrinsic value. The paper currency is pegged against some valuable commodity such as gold or silver, which attaches value to paper as a medium of exchange and measure of value.
The commodity-backed money does not use commodities such as gold and silver as money. Instead, it uses the value of such commodities for transactions. Therefore, the commodity-backed money system uses resources more efficiently than the system of commodity money.
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