Identify the type of money used for each transaction. Tiles: 1) Chris bought a bagel with coins issued by the government. 2) Karen bought a bike by exchanging it for her silver receipt. 3) Luke paid six apples for two dozen eggs. Pairs: 1) representative money 2) commodity money 3) fiat money
The correct answer and explanation is:
Correct Pairing of Transactions and Types of Money:
- Chris bought a bagel with coins issued by the government. → Fiat money
- Karen bought a bike by exchanging it for her silver receipt. → Representative money
- Luke paid six apples for two dozen eggs. → Commodity money
Explanation (300 words):
Money serves as a medium of exchange, a unit of account, and a store of value. Throughout history, different types of money have been used, and each serves these functions in different ways depending on the system in place.
- Fiat money is currency that has value because a government maintains its value or declares it as legal tender. It is not backed by a physical commodity like gold or silver. In the scenario, Chris uses coins issued by the government to buy a bagel. These coins have no intrinsic value (they’re not made of precious metals) but are accepted widely because the government says they must be. Therefore, this is an example of fiat money.
- Representative money is not money itself but a token or certificate that can be exchanged for a specific commodity, such as gold or silver. It derives its value from the commodity it represents. When Karen exchanged her silver receipt for a bike, she used a document that entitles her to a certain amount of silver. The seller accepted it based on the promise that it could be redeemed for silver. This is characteristic of representative money.
- Commodity money has intrinsic value and can be used directly. Common historical examples include gold, salt, or livestock. In Luke’s case, paying six apples for eggs is a barter-like system where goods with value are exchanged directly. Since the apples themselves have value and are used in trade, this is commodity money.
Understanding these distinctions helps in grasping how money evolved from tangible goods to the abstract system we use today. Each form reflects a different stage in economic development and trust systems.