- 1. Money has three functions: (1). Medium of exchange: it allows for trade to take place through indirect exchange and more specialization. (2). Unit of account: Acts as a yardstick of value since all prices can be stated in money terms. (3). Store of value: It holds or has a stable value over time. Explain each function using the example of how cigarettes performed each function in the prisoner of war camp article. Which function is the most important and why?
- 2. How is illiquidity different from insolvency? Show each scenario using two separate balance sheets for a commercial bank.
- 3. If the interest rate is 10%, what is the present value of a security that pays you 1100 next year, 1210 the year after and 1331 the year after that?
(The pdf of the article below, answer need 1 or 2 paragraphs. no need extra reference.)