Why is a stable monetary system essential for the smooth operation of a market system? What would an unstable monetary system be like? Why isn't a barter economy just as efficient as an economy with money?

Answer 1

A stable monetary system allows us to exchange currency for the goods and services we desire. We also accept currency knowing it will retain its value, and we can, therefore, use it at a later date. In an unstable system, currency loses its value rapidly (due to rising prices). People would be unwilling to accept the currency or would only want to hold it for very short periods. A barter economy, where goods are exchanged for goods, is less efficient because it is predicated on a coincidence of wants. I have to want the good you are offering, and you have to want what I have. Also, if what I have is perishable (for instance, bread), I will have to trade quickly for goods I do not necessarily need at the time. Because of inefficiency, barter economies evolve into money economies where certain goods, such as gold, become the medium of exchange.