[Economy] Money-Bitcoin: Functions of Money, Exchange Medium, Transfer Value-NEFT-RTGS-Bitcoins, Money Illusion, Overcapitalization (Part 3)

Economy29 Comments

  1. Prologue
  2. Money: functions
    1. Primary functions of money
      1. #P1: As a medium of exchange
      2. #P2: As a measure of value
    2. Secondary Functions / Derivative functions
      1. #S1: As a store of value
      2. #S2: Transfer of Value / Purchasing Power
        1. Transfer of Value in Bitcoin System
        2. Transfer of Value: NEFT vs RTGS vs Bitcoin
      3. #S3: as a standard of deferred payment
    3. Contingent Functions
      1. #C1: Basis of Credit
      2. #C2: Distribution of National Income
      3. #C3: Equalizes Marginal utility of Expenditure
    4. Other functions/utilities
  3. Money limitations/drawbacks
    1. #1: Inflation & Deflation
    2. #2: Money illusion
    3. #3: Price stickness
    4. Bitcoins vs Money illusion
    5. #4: Overcapitalization
  4. Mock Questions

Prologue

Before proceeding further, make sure you’ve read earlier two parts in this series:

  1. Barter-Money-Bitcoin: Fungibility, Double coincidence of wants, division of labour (Part 1)
  2. Barter-Money-Bitcoin: Circular Flow of Income, Savings to Investment, Time Value of Money, Deferred Payments (Part 2)

From those two articles, we concluded that both Money system (and Bitcoin system) are superior to Barter system. So now Barter system is out of equation.

  • Now, only two contenders remain:  Money vs Bitcoins.
  • In this article, we’ll see the functions and limitations of money-system. Of course everyone knows the function of money= you need money to buy stuff- that is common sense. But to solve theory based MCQs, particularly for UPSC and RBI exams, a bit more refined understanding is necessary.
  • In the upcoming articles after this, we’ll look at the evolution of money (commodity money, metallic money, fiduciary money, gold backed paper currency, fiat currency, bank money.)
  • And then we’ll see how Bitcoins system works, its own benefits and limitation.

Money: functions

From the discussion so far, we’ve learned that Money was invented to overcome the limitations of barter system. Overall, money serves following functions:

Primary functions
  1. A Medium of Exchange
  2. A measure of Value
Derivative functions

  • Derived from the primary functions.
  • also called Secondary functions
  1. A Store of Value
  2. Transfer of Value
  3. A Standard of Deferred Payments
Contingent Functions

  • they arise because of the stage of economic life we live in.
  1. Basis of Credit
  2. Income distribution
  3. Equalize Marginal utility

Let’s check these functions and how Bitcoin fares on these parameters.

Primary functions of money

If a given thing cannot perform the primary functions, we cannot call it money. If something wants to call itself “money” then it must ALWAYS perform following two functions, irrespective of time and place.

#P1: As a medium of exchange

  • Money is the medium through which goods and services are traded.
  • Money provides ‘freedom of choice’ in purchase. You don’t need ‘double coincidence of wants’.  Vijay Mallya can send his son to any coaching class, irrespective of the fact whether “sir” drinks beer or not.
  • But to become the ‘medium of exchange’, money must meet following conditions:
ConditionFiat Currency (Rs. $)Bitcoin
  1. Readily acceptable.
yes because it is issued by the government (or its Central  Bank)Not yet. Since Bitcoin is not issued by government, most people don’t trust it.You already know how Chinese RBI (People’s bank of China) has issued warning against use of Bitcoins.

Similarly, a day before Christmas, even Indian RBI issued warning against Bitcoin use (click me to read the press statement).

  1. Durability
yes (unless someone burns or tears it apart)Even more durable than paper currency. (Unless someone shuts down the entire internet.)
  1. Cognizable
Yes, even illiterate people can recognize and differentiate between currency notes based on their dimension, color and images.Less. Because illiterate cannot recognize it. Even a literate person will require computer, special software and internet to recognize & use Bitcoin.
  1. Easily Divisible
YesEven more.
  1. Fungible
YesYes, for now.
  1. Hard to counterfeit?
Hard but not impossible. ISI even runs PG Diploma course in how to counterfeit Indian currency.Bitcoins are created by crypto-currency mathematical algorithm= Harder to counterfeit, but not impossible once the Quantam Computers are invented.
  1. Easy to carry / Portable
yesAnswer is both yes and no.

  1. Yes because Bitcoin is a digital currency, can be used via mobile, tablet, laptop etc. as long as you know the password (private key.)
  2. No, because Bitcoin system cannot work without electricity, internet connection. It’ll not work if you forget the password (private key).

As you can see, Bitcoin doesn’t fully meet the all the conditions. Therefore,

  1. Bitcoin =less reliable “Medium of exchange” at the moment.
  2. And since Bitcoin is less unreliable “medium of exchange” => therefore, Bitcoin sucks at all the remaining primary, secondary and contingent functions of money e.g. deferred payment, storing wealth, distributing income etc. (atleast for now)

#P2: As a measure of value

Lengthcentimeter, meter
Weightgram, kilogram
Value Of Goods n ServicesRupee, dollar or any other currency.
  • Money serves a “measure” or “unit” by which, we can measure the value of goods and services.
  • This also helps comparing between various goods and services.

Money’s function as “a measure/unit of value”, helps in following ways:

  1. To compare two products more rationally e.g which car is more fuel efficient, which refrigerator is more energy efficient and so on.
  2. To maintain accounts, keep track of income, expense, rents, wages, interest, profit, loss, tax liabilities.
  3. To measure the GDP of every country: Within that, how much is coming from primary, secondary and tertiary activities.
  4. To Measure income distribution among various families, to find the impact of welfare policies, labor laws etc. and amend policies/acts/schemes/subsidies accordingly.

What about Bitcoin?

  • Yes, possible to measure value of everything in Bitcoin
  • Theoretically, accounting keeping even more efficient in Bitcoin than in fiat currency, as we saw in Article Part II.
  • But difficult at the moment because (1) Bitcoins are not readily accepted. (2) exchange rate volatile.

Secondary Functions / Derivative functions

These are functions/utilities derived from the primary functions of money viz. (1) Medium of exchange (2) Measure of Value.

#S1: As a store of value

  • Money= medium of exchange, measure of value, durable, takes little space, most liquid among all assets, readily accepted=> hence money is a reliable store of value.
  • When you store money, you’re storing the “value” of your labor spent in production of any goods / services.
  • This is also called “asset function” of money.

What about Bitcoin?

  • Yes in theory, it is possible to store value in Bitcoin, but it is full of problems, as we saw in Part II.
  • And if you think from another angle: why is Bitcoin not a reliable store of value? Answer: Because Bitcoin is not fully serving the two primary functions of money viz. (1) Medium of Exchange (2) Measure of value.

#S2: Transfer of Value / Purchasing Power

  • Money takes little space + durable =>cost of transporting money is very less (compared to sending that much “value” payment in form of wheat or sugarcane in a barter economy).
  • Earlier, in barter system, most trading activities were confined within village or tehsil because of the value-transfer problem over long distance.
  • But now, with Money + Modern banking system = interstate and international trade possible.
  • A trader in Tamilnadu can order Apples from Himachal and pay via cheque, money order, bank draft, credit card, netbanking etc. and that too without meeting the seller face to face.
  • Thus, the transfer value of money, has extended the radius within which we can perform trade.

Transfer of Value in Bitcoin System

Similar to email exchange, but with slight modification.

EMAIL TRANSFERBITCOIN TRANSFER
You need an email accountYou need a digital wallet /e-wallet.
Your email account has a unique address <[email protected]>Your digital wallet has unique public address. For example: “17c9gwurQ41noaNoMyb9QDjVfDvceTP5SD”
In the email client (e.g.Outlook), you enter recipient’s email address, subject and body. Hit “Send” button and message is sent.in the Digital wallet software, you enter recipient’s public address, amount of BTC to send and hit “send” button and money is sent.
The “central authority” (Google) will monitor and validate such email exchanges.

  • When did the email originate? (DD:HH:MM:ss);
  • From where did the email originate? (IP Address);
  • To whom it was sent? (To,CC,BCC)
  • Bitcoin system doesn’t have a central authority.
  • But there is an electronic public ledger called “Block Chain”.
  • This blockchain contains record of every transaction ever processed, allowing a user’s computer to verify the validity of each transaction.
  • Raja can forward the same email to any number of contacts.
  • In other words, “Double sending” possible.
  • Double spending not possible.
  • Each transaction is cross-verified with that public ledger (Blockchain).
  • Raja cannot ‘forward’ the same bitcoin to two people.
  • Email is delivered within seconds.
  • Double-spend Verification process can take upto ten minutes.
Lost/Forgotten password can be recovered.Not possible.

so, in theory, yes it is possible to transfer value using Bitcoins.

Transfer of Value: NEFT vs RTGS vs Bitcoin

  • NEFT and RTGS are two facilities offered by RBI.
  • They help transfer money using internet from one bank account to another.
RTGS: Real Time Gross SettlementNEFT: National Electronic Fund TransferBitcoin
Processing fees between 25-55 rupees. (includes SERVICE TAX)Processing fees: 2.50-25 rupees (includes SERVICE TAX)No such processing fees or service tax.*
Money transferred instantly. Just like email from one account to another.
  • Net Transfers at interval of “1 hour” cycles.
  • Meaning, if you send money @9.15AM then it’ll reflect in recipients account @ next interval i.e. @10AM.
Instant transfer like email.but ‘double spend verification’ can take upto 10 minutes.
  • Weekdays: 9 to 4:30PM
  • Saturday: 9 to 1:30PM
  • **Weekdays: 8AM to 6:30PM
  • Saturday: 8AM to 12:30PM
Round the clock, 24/7.  also works on holidays.
Centralized monitoring by RBIIt’s a decentralized system.
  • You need recipients (1) Bank account number and (2) Bank Branch code (IFSC).**
Only need the “public address” of recipient’s digital wallet.
Both sender and receiver must have bank account.= must meet “KYC norms”Anyone can open a digital wallet account. You don’t even need an email address. Even a Robot / AI can open.
Ceilings on Money transfer:SBI Retail Banking: NEFT Rs.0 to 2 lakhs; RTGS: 2 lakh to 5 lakh.

Higher limits for corporate banking.

No such ceilings.

*this is one of the reasons why Banks hate Bitcoins because they can’t earn commission on money transfer- like in traditional netbanking and credit card.

** IFSC or Indian Financial System Code is an alpha-numeric code that uniquely identifies a bank-branch participating in the NEFT system.

#S3: as a standard of deferred payment

  • Deferred payment = when you buy a goods/services right now but promise to pay at future date. e.g car on EMI
  • Money=ideal store of value, it is durable, divisible, has greater acceptability. And we already learned about the ‘time value of money’. Hence:
  1. Money makes borrowing and lending less risky.
  2. Money can be used as a standard of deferred payment / future transection.

What about Bitcoins? Yes in theory, Bitcoin can serve as a standard of deferred payments, as we saw in Part II.

But at the moment it is full of problems because Bitcoin is not fully serving the primary functions viz. (Medium Exchange + Measure of Value)

Contingent Functions

#C1: Basis of Credit

  • Today, majority of business activities are done on credit.
  • Households save money in bank=> bank lends it to business firms.
  • Even the other credit instruments like cheque, drafts, credit card, promissory notes are also backed by money.
  • Banks could never create this ‘credit / loan’ if Households did not provide the money. and IF money did not serve the earlier primary and secondary functions.

What about Bitcoins? Same answer as earlier. Possible in theory, but difficult at the moment. (because Bitcoin is not fully serving the two primary functions of money).

#C2: Distribution of National Income

  • Producing even a single toothpaste requires joint effort of many- from the chemist who designs the formula, to laborer who pours ingredients in the assembly line, to the engineer who handles the machines, to the manager who supervises over all them and so on….
  • In a barter system, difficult to determine the how much each of them should earn from the total production.
  • But money’s primary function =”measure of value”. Makes it possible to determine the share of individual worker in the total production and pay him accordingly.
  • Anyone who provides any of the four factors of production (land, labour, capital, entrepreneurship) =he will earn money (as rent, wage, interest or profit) = less chances of exploitation (compared to the Barter system, feudal times, Zamindari bonded labours.)
  • Thus, money helps in distribution of income among various factors of production.

What about Bitcoins? Same answer as earlier. Possible in theory, but difficult at the moment. (because Bitcoin is not fully serving the two primary functions of money).

#C3: Equalizes Marginal utility of Expenditure

  • Diminishing Marginal utility= the more we have of one item, every new additional unit gives less satisfaction.
  • For example: A farmer grows sugarcane- first few kilos he can use for himself and his family.
  • But they’ll get tired chewing sugarcane for lunch, dinner and breakfast every day. So, each new kilo of sugarcane brings them less satisfaction.
  • At some point, they’ll get so fed-up with the sweet taste, they’ll just want to throw away all the sugarcanes.
  • Under barter system, this could lead to distress sale:- farmer ready to exchange 100 kilos sugar just for few grams of chilli powder because for him:-
    • marginal utility of sugarcane= zero or even negative
    • marginal utility of chilli powder = high.

Money system solves this problem:

  • Money = measure of value = helps the consumer to measure the marginal utilities of the commodities based on their price-tags = he can spend money such that each unit of money spent bring him goods of same marginal utility.
  • In our case, farmer could sell the sugarcanes to sugarmill owner then use the money @local kirana-store to purchase
    • just enough sugar for making tea (marginal utility of sugar=high)
    • just enough chili-power for cooking daal-sabji etc. (marginal utility of chilli=high)
  • Money facilitates the consumer to equalize the marginal utilities obtainable from different commodities = opportunity to get “maximum satisfaction” from each purchase.

What about Bitcoins? Same answer as earlier. Possible in theory, but difficult at the moment. (because Bitcoin is not fully serving the two primary functions of money).

Other functions/utilities

Gives liquidity to Capital

  • Money is the most liquid asset among all assets. You can easy convert money into any type of asset according to your needs. If your hotel is not running fine, sell it and use the money to setup a shopping mall.
  • If a mutual fund manager is not giving best return on your investment, ditch him and invest money somewhere else.
  • Because of this ‘liquid’ quality of money=> capital is transferred from less productive areas to more productive areas.
  • In a barter system, sick firms will continue to run sickly. But money system will kill them and transfer the capital to more productive firms of the economy.

Tool to measure aukaat:

  • In a Barter economy, Mallya could impress other business parties through his lavish lifestyle and media image. So, even if his company was making losses, he was on a verge of #epic-business-fail, he could still make new business deals to his advantage.
  • This is not possible in money system. Before merge-acquisition-partnership, the other party will demand to see your account books, assets, liabilities, bank balance, everything.
  • Recall money’s primary function “measure of value”= can easily find if give firm is solvent or bankrupt.

Money as a tool of Social empowerment

  • In barter system, all the power was concentrated in the hands of rural elites, Zamindar, Feudal lords who owned land and cattle.
  • Money system creates more jobs, and provides more opportunities to Women/SC/ST/OBC/PH. A person’s status is no longer tied to caste/race/religion/gender/appearance but to his ability to earn money.

Other functions that we already saw:

  1. Money Promotes division of labor => higher production.
  2. Money turns savings into investments (through circular flow of money.) Thus, both households and business firms benefit from each other.

Money limitations/drawbacks

So far we only learned the positive things about money. Now let’s check some negative aspects:

#1: Inflation & Deflation

  • Overprinting / Excessive supply of money without increase in production of goods and services=> inflation (prices increased)
  • Excessive fall in the supply of money= money becomes ‘dear’, borrowing cost increases=production level declines=> deflation (prices fall down).

in a separate article later, we’ll see issue of inflation/deflation with respect to money supply in Fiat currency vs Bitcoin. Otherwise the current article will become too long. So, let’s move on to next limitation of money:

#2: Money illusion

For money, real value and face value is not always the same.

Face value of moneyReal value money
Face value is what is written on the piece of currency paper.Real value of money= how much can it ‘really’ buy? What is the purchasing power of money?
A fifty rupee note

  • Reads “50” in 2008
  • Reads “50” even in 2013.
Can fifty rupee note buy you a litre of petrol?

  • Ans. Yes (in 2008)
  • Ans. No (in 2013)

Money illusion comes when people start valuing their wealth in terms of ‘face value’ of money rather than on ‘real value’ of money. For example:

  • 2008: A worker’s  monthly salary was Rs.5,000 and at that time, cost of one litre petrol was Rs.50
  • 2013: factory owner hikes the worker’s salary to Rs.7000. Worker get really happy. But the cost of one liter petrol has rose to Rs.70-80 and similarly prices of all essential commodities have increased. Worker’s real purchasing power hasn’t increased. But he’s happy, because he is suffering from money illusion.
  • 2014: suppose petrol price goes down to Rs.50 again and similarly prices of all essential commodities have gone down to the 2008’s level. BUT if now factory owner tries to decrease the salary of worker back to Rs.5000=> workers’ morale will go down, they’ll protest-strike-dharnaa-pradarshan-gherao.  Because they’re suffering from money illusion.

Why is this money illusion a bad thing?

  • Most insurance/Mutual Funds/child-plan-investment companies fool their customers.……after 10 years your money will double……if you deposit 10 rupees per day in our scheme, then after twenty years you’ll get 50 lakh rupees and you child’s future is secured.
  • But often, such money-return calculations are not linked with inflation. 50 lakh is a big amount right now but after 20 years, you can’t even buy a one room-kitchen apartment with it even in city.
  • All private companies fool their employees by hiking the salary at a rate less than the inflation rate.
  • Most contracts are not linked objectively with ‘real value of money’ or inflation. Consider house leasing agreement. Suppose you live in a rented house that cost Rs.7000 per month. Next year, you can be damn sure the landlord will demand higher rent arbitrarily without considering the overall rise or fall in the wages/inflation rates for service class employees in the given city.
  • Media and political parties confuse the face value of money with real value of money. Lot of hype is created even when price of petrol goes up or down by 1-2 rupees. Hence government will withhold the price hike before state-elections. This type of election-centric economic policies hurt in long term.
  • Election commission will not allow political parties to spend more money on campaign, with respect to the food and fuel inflation. While the crook politicians will still spend crores, the honest politicians suffer because they’ve to stick to the official limit on expenditure.
  • And more importantly, Money illusion causes price stickness.

#3: Price stickness

  • It is the tendency of prices to remain sticky (same), irrespective of whether the cost of production has increased or decreased. for example:

Chocolate business and Price stickness:

  • Most of the chocolates cost 50 paisa to 1 rupee. This was the MRP in 2001, and hasn’t changed even now in 2013, while the sugar price, cocoa beans and transportation cost has skyrocketed. So, ideally, price of chocolates/peppermints should also increase.
  • But since chocolate is a non-essential commodity, business is highly competitive, and customers suffer from money illusion=> no firm can dare to raise the MRP of chocolates. This price stickness leads to many negative consequences:
  1. Adulteration, using cheap but harmful colors and artificial sweeteners to keep to production cost down.
  2. tax evasion to keep the profit levels same.
  3. Laying off workers to reduce the cost of operation.

Airline industry and Price stickness:

  • Airline business is highly competitive, so even when aviation fuel becomes more expensive, even if government doesn’t reduce taxes on it, still the airlines cannot increase the ticket prices much.
  • Besides even when Air-India makes losses, government will save them, so Air India won’t hike the ticket prices, and if private airlines want to remain in business, they’ll have to sell tickets at that same or lower price rate than AirIndia.
  • Thus, all airlines are bleeding dry and making losses.
  • The extreme manifestation of this price stickness =Kingfisher airline’s #epicfail, staff doesn’t get salary even for Diwali.

Bitcoins vs Money illusion

  • Money illusion (and price stickness) comes when people confuse face value of money with real value (purchasing power) of money.
  • Real value of bitcoin=how much petrol, pizza or desi-liquor can you really buy using bitcoins? That will keep changing as per the laws of supply and demand.
  • Besides, most of the shops don’t accept bitcoins. so, even if you earn in Bitcoins, at some point you’ll have to get it converted to a fiat currency (like rupee, dollar, euro, yen or Yuan) to purchase daily necessities.
  • But since fiat currency has the problem of money illusion and price stickiness, therefore, bitcoin will indirectly have the same.

#4: Overcapitalization

  • As we saw earlier, money system facilitates savings to become investments, and the whole ‘circular flow of income’. But this blessing also becomes a curse during ‘overcapitalization’.
  • Overcapitalization= A company has more capital than what is optimally required production of goods and services.

Ok but why is it bad? Recall There are two ways to raise capital: Debt vs Equity.

Case #1:  Imagine an Overcapitalized Company setup entirely on equity (shares). But and on each of these shares, company has to pay dividend. As a result

  1. Individual shareholder’s ‘share’ in profit declines, because company is not fully utilizing the capital. (Imagine a person with Rs.5000 salary and 50 kids: how much food will be there in every plate?)
  2. Hence the market value of these shares decline = shareholder cannot even profitably sell them to a third party and ‘exit’ from the game.

What’s the solution: company should buyback some of the shares from shareholders.

Case #2:  Imagine an Overcapitalized company setup entirely through debt (loans/bonds). But on such debt, Company has to pay interest regularly, as a result:

  1. Company has to raise the MRP of its products to raise the profit levels=>loses in price war with rival companies.
  2. If company tries to cut down wages to raise profit=>labour unrest.
  3. So save costs, company may postpone repair and service of machinery => risk of industrial accident and other long term problems.
  4. Company starts manipulating account books, borrows more debt to pay previous debt- gets stuck in this cycle.

Overall

  1. Overcapitalized company’s capital is not effectively utilized = constant decline in earnings.
  2. And since capital = finite + scare=> Overcapitalization in one company, also starves other efficient companies in the market from necessary capital.

What about Bitcoins? Well companies in bitcoin system can also suffer from overcapitalization, if idiots or crooks are running the company.

Money as the root of all evil

  • And finally the most negative thing about money: that money is considered the root of all evils- theft, robbery, frauds, embezzlement, corruption, buying votes through money, the rising divide between India and Bharat, labour exploitation, prostitution, drug-trafficking, hoarding and all other moral, social and political evils.
  • But even if we were living in a barter system, it is unlikely that Raja or Kalmadi would have been honest men.
  • Infact, peasants were more oppressed by kings and nobility during Barter system. So money is not the root of all evil. Greed/Desire/Lust= root of all evil.

Mock Questions

  1. In a modern economy, trade can happen without double coincidence of wants. This is possible because, _____.
    1. Money is a store of value.
    2. Money is a medium of exchange
    3. money is a measure of value
    4. money is a standard of deferred payment
  2. When a debtors makes a promise to pay on some future date, Money is serving the function as a _____ .
    1. store of value.
    2. medium of exchange
    3. measure of value
    4. standard of deferred payment
  3. What is/are the primary function(s) of money?
    1. Money is a medium of exchange
    2. money is a measure of value
    3. Both A and B
    4. Neither A nor B
  4. Incorrect statement(s)
    1. Money equalizes the marginal utility of various goods.
    2. Money guarantees liquidity to all types of wealth.
    3. Both A and B
    4. Neither A nor B
  5. What do you understand by the term “Price Stickness”?
    1. A trader refusing to give discount on MRP, even if his competitors are giving discounts.
    2. The graphs of the price of a commodity and the graph of inflation will run parallel, as if inflation and prices were stuck together by an invisible bond.
    3. Price persistence of a good or service despite changes in broad economic conditions.
    4. None of Above
  6. A person is said to suffering from Money illusion, when he _____ .
    1. Invests in bitcoins and other virtual currencies.
    2. Measures his wealth on face value of money.
    3. Measures his wealth on real value of money.
    4. None of above.
  7. Efficient Functioning of Bitcoin rests on a system called “Blockchain”. What do you understand by the term blockchain?
    1. It is the private key that User needs to open his digital wallet.
    2. It is the public address of user’s digital wallet account.
    3. It is a public ledger that keeps record of all bitcoin transactions.
    4. None of above.
  8. Which of the following factors make Bitcoin system far superior than Rupee system?
    1. Bitcoin’s face value and real value is same.
    2. In Bitcoin system, the prices of all goods and services always move in tandem with the laws of supply and demand and broad conditions of economy.
    3. Both A and B
    4. Neither A nor B

Assertion-Reasoning type MCQs

Assertion reasoning instructions: Each of the following questions contain a set of Assertion (A) and Reasoning (R) statements. Use appropriate Answer codes from following:

  1. Both A and R correct and R is the correct explanation for A
  2. Both A and R correct but R is not the correct explanation for A
  3. A is correct but R is wrong
  4. A is wrong but R is correct

Question sets:

  1. (A) In a modern economy, trade can happen without double coincidence of wants (R) Money functions a unit to measure the value of all goods and services.
  2. (A) A worker will feel happy even if his pay increase merely brings his real wage in line with rising prices. (R) Most workers suffer from money illusion.
  3. (A) Money system is more efficient in the distribution of income than Barter system. (R) Money equalizes the marginal utility of various goods and services.
  4. (A) Money increases the mobility of capital. (R) Money is the most liquid asset among all assets.

Q13. What are the secondary functions of money?

  1. Money is a store of value.
  2. Money is a medium of exchange
  3. money is a measure of value
  4. money is a standard of deferred payment

choice

  1. only 1 and 2
  2. only 2 and 3
  3. only 1 and 4
  4. only 3 and 4

Q14. What do you understand by the term “Money Illusion”?

  1. It is the strategy used by MLM (Multi level marketing) schemes to attract gullible investors.
  2. That most people focus more on the amount of money they possess rather than what is actual worth of that money.
  3. That money today is more valuable than the same amount of money in future.

Answer choices

  1. Only 1 and 2
  2. Only 2
  3. Only 2 and 3
  4. All of them

Q15. How is RTGS similar to Bitcoin system?

  1. RTGS Works on 24/7 basis just like Bitcoin transfer.
  2. RTGS doesn’t attract service tax just like Bitcoin transfer.
  3. RTGS Can be used to transfer any amount of money just like Bitcoin transfer.

Choice:

  1. Only 1 and 2
  2. Only 1 and 3
  3. Only 2 and 3
  4. None of above.

Q16. Bitcoin could be used as a store of value / wealth, IF ____.

  1. Everyone accepted Bitcoin as a medium of exchange.
  2. Bitcoin did not have the lag of 10 minutes per transaction.
  3. Everyone accepted Bitcoin as a measure of value.
  4. Its algorithm allowed recovery of lost/forgotten passwords.

Choice:

  1. Only 1 and 2
  2. Only 2 and 3
  3. Only 1 and 3
  4. Only 1 and 4

Q17. A Bitcoin system is immune from

  1. Price stickness
  2. Overcapitalization
  3. Money illusion

Answer choices

  1. Only 1 and 2
  2. Only 1 and 3
  3. Only 2 and 3
  4. None of above.

Visit Mrunal.org/Economy For more on Economy.





So far 29 Comments posted

  1. Raghuvansh

    Law Of Diminishing Marginal Utility=Decrease utility derived with additional input
    Law Of Marginal Utility=Additional satisfaction gained from one additional unit

  2. sudhir

    Can somebody please help me in getting the old text books from maharashtra board on civics for class 9th & 10th. Because since State Services Exams are up on 2nd of Feb 2014. Any one please help.

    Mrunal sir,
    please share any site if I can download it

  3. Indian87

    1.b
    2.d
    3.c
    4.a
    5.c
    6.b
    7.c
    8.b
    9.b
    10.a
    11.b
    12.a
    13.c
    14.b
    15.d
    16.c
    17.d

    discussion, if any wrong ans..?

  4. Swaroop

    mrunal sir, thanks for the article. it was really helpful. I have one doubt sir.. in many of the cases we can achieve the same result with the Fiat Money as well by upgrading our current technology. in such a case why do we need a separate currency called Biticons ?

  5. Biswajit Mondal

    Can any one please explain q 14. is 1 and 2 are effect of money illution or they can be considered as money illution.

  6. harsh

    nice mcq
    1. b
    2. d
    3. c
    4. d
    5. c
    6. b
    7. c
    8. d
    9. a
    10. a
    11. b
    12. a
    13. c
    14. a
    15. d
    16. c
    17. d
    correct me if wrong and please provide explanation for the same. thnkx

  7. abhi

    m downloading csm 2013 papers frm official upsc website,bt after dwnload whn i try to open d pdf file it says ‘unable to open,file corrupted’,this prblm is wid all d papers i downloaded,is any1 facing same prblm??wht to do??

    1. RAS

      Waiting for the same. Mrunal can we have some article on the RAS MAINS as RPSC has changed for this year that you must be aware of.
      Especially Paper 3 – IR/current/ethics/pub ad. one. Substandard material has already started floating, seeking your advice before we go for any of ‘em.

  8. madhu

    1)b
    2)d
    3)c
    4)d
    5)c
    6)b
    7)b
    8)d
    9)b
    10)a
    11)a
    12)a
    13)c
    14)b
    15)d
    16)c
    17)
    please correct me if i am wrong.

  9. shivendra

    Dear Mrunal sir
    I am a great admirer of you. Please post the article at regular intervals. You are the only hope for the aspirants from small towns and villages.

  10. Yogesh

    Good article…but I doubt if bitcoins could ever become a full fledged currency…because of obvious reasons
    1)First… because it is a virtual/digital currency….and obviously prone to privacy issues and hacking.
    2)Second…The technology can be upgraded and taken to a next level in existing e-banking system including all the positives of bitcoins… while making the need for a bitcoin type of currency almost negligible.

  11. coconutninja

    Bitcoins can be replaced by fiat currency but the beauty of it is its not controlled by any government.
    RBI prints more rupees or less rupees to control its value eg china not allowing renminbi to gain with dollars it will lower its export but america is losing as it cannot export cheaper to china .not possible with bitcoins as number of bitcoins are fixed.
    It removes the needs for banks.you dont have to pay service fees,transaction fees etc.
    Each bitcoin is encoded with the blockchain.so the ledger is in all the bitcoins.so instead of one trusted party you have thousands of distrusted parties.

    Hacking might be possible.but there have been no reports of it yet.
    another solution for money laundering,black money is to force everyone to declare their bitwallet to RBI.

  12. coconutninja

    Bitcoins can be replaced by fiat currency but the beauty of it is its not controlled by any government.
    RBI prints more rupees or less rupees to control its value eg china not allowing renminbi to gain with dollars it will lower its export but america is losing as it cannot export cheaper to china .not possible with bitcoins as number of bitcoins are fixed.
    It removes the needs for banks.you dont have to pay service fees,transaction fees etc.
    Each bitcoin is encoded with the blockchain.so the ledger is in all the bitcoins.so instead of one trusted party you have thousands of distrusted parties.

    Hacking might be possible.but there have been no reports of it yet.
    solution for money laundering,black money is to force everyone to declare their bitwallet to RBI.

  13. Neha Gupta

    Production(printing) of new Bitcoins is called mining. There are specialised softwares to maintain bitcoin block chains and solve riddles to help in processing transactions. In other words, if I am helping in maintaining the bitcoin network by running the software on my computer, I can earn bitcoins as well for my service. How and how much is coded into the software. But the downside is that, big powerful computers and specialised hardware are already mining at great speeds. So there is chance of money laundering and accumulation of wealth in few hands. The geeks are finally winning after all!!!

  14. aditya

    If bitcoin has a public ledger or block chain, why can’t it be used for verifying the illegal payments to terrorists and smugglers?

  15. akashay

    sir, in case of airline price stickiness will not come. as in that case the government policies are not in favor of airlines.
    and air india prices are not constant.

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