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Difficulty: HardTypes and Forms of Money

A commercial firm receives four distinct financial assets during its daily trading operations:

I. Base metal coins whose face value substantially exceeds the intrinsic commodity value of the metal contained within them.
II. Paper currency issued by decree of the central bank that must be legally accepted in settling debts.
III. Short-term Treasury bills that serve as a reliable store of value and can be converted into cash quickly without significant loss.
IV. A crossed cheque drawn by a customer on a commercial bank deposit account.

Which of the following correctly pairs Instrument I and Instrument III with their exact monetary classifications?

  1. Instrument I is token money, while Instrument III is near money.Answer
  2. B
    Instrument I is commodity money, while Instrument III is legal tender.
  3. C
    Instrument I is token money, while Instrument III is bank money.
  4. D
    Instrument I is fiat money, while Instrument III is legal tender.

Answer

Instrument I is token money, while Instrument III is near money.
Token money is defined as currency whose face value exceeds the intrinsic value of the commodity from which it is made. Near money (or quasi-money) consists of highly liquid non-cash assets, such as Treasury bills, that serve as stores of value and can be readily converted into cash.

Step-by-Step Solution

1
Analyze Instrument I
Coins whose face value exceeds their intrinsic material value are classified as token money.
Token money derives its purchasing power from government backing and face designation rather than the market value of its physical material.
2
Analyze Instrument III
Treasury bills are highly liquid financial instruments that act as a store of value and can be rapidly liquidated into cash, classifying them as near money.
Near money refers to liquid assets that cannot be spent directly as a circulating medium of exchange but can be converted into legal tender quickly with negligible loss.
3
Match the correct classification pair
Combining both classifications yields Instrument I as token money and Instrument III as near money.
This precisely matches the defined attributes of both forms of money.

Key Concept

Classifications and Characteristics of Money (Token Money vs Near Money)
Estimated Time:1m 30s
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Topics

Types and Forms of Money

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