Money As The Unit Of Account – IELTS Reading Answers

Janice Thompson

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Updated On Aug 14, 2024

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A The most difficult aspect of money to understand is its function as a unit of account. In linear measurement we find the definition of a yard, or a metre, easy to accept. In former times these lengths were defined in terms of fine lines etched onto brass rods maintained in standard laboratories at constant temperatures. Money, however, is much more difficult to define because the value of anything is ultimately in the mind of the observer, and such values will change with time and circumstance. Sir Isaac Newton, as Master of the Royal Mint, defined the pound sterling (£) in 1717 as 113 grains of pure gold. This took Britain off silver and onto gold as defining the unit of account. The pound was 113 grains of pure gold, the shilling was 1/20 of that, and the penny 1/240 of it. By the end of the 19th century the gold standard had spread around most of the trading world, with the result that there was a single world money. It was called by different names in different countries, but all these supposedly different currencies were rigidly interconnected through their particular definition in terms of a quantity of gold.

B In economic life the prices of different commodities and services are always changing with respect to each other. If the potato crop, for example, is ruined by frost or flood, then the price of potatoes will go up. The consequences of that particular price increase will be complex and unpredictable. Because of the high price of potatoes, prices of other things will decline, as demand for them declines. Similarly, the argument that the Middle East crisis following the Iraqi annexation of Kuwait would, because of increased oil prices, have led to sustained general inflation is, although widely accepted, entirely without foundation. With sound money (money whose purchasing power does not decline over time) a sudden price shock in any one commodity will not lead to a general price increase, but to changes in relative prices throughout the economy. As oil increases, other goods and services will drop in price, and oil substitutes will rise in price, as the consequences of the oil price increase work their unpredictable and complex way through the economy. The use of gold as the unit of account during the days of the gold standard meant that the price of all other commodities and services would swing up and down with reference to the price of gold, which was fixed. If gold supplies diminished, as they did when the 1850s gold rushes in California and Australia were finishing, then deflation (a general price level decrease] would set in. When new gold rushes followed in South Africa and again in Australia, in the 1880s and 1890s, the general price level increased, gently, around the world, as there was more money in circulation.

C The end of the gold standard began with the introduction of the Bretton-Woods Agreement in 1946. This fixed the value of all world currencies relative to the US dollar, which in turn was fixed to a specific value of gold (US$0.35/oz). However, in 1971 the US government finally refused to exchange US dollars for gold, and other countries soon followed. Governments printed as much paper money or coinage as they wanted, and the more that was printed, the less each unit of currency was worth. The key problem with these government ‘fiat’ currencies is that their value is not defined; such value is subject to how much money a government cares to print. Their future value is unpredictable, depending as it does on political chance. In past economic calculations of the Australian Institute for Public Policy, incomes and expenditures were automatically converted to dollars of a particular year, using CPI deflators, which are stored in the Institute’s computers. When the Institute performs economic calculations into the future, it guesses at inflation rates and includes these guesses in its figures. The guesses are entirely based on past experience. In Australia most current calculations assume a three to four per cent inflation rate.

D The great advantage of the 19th century gold standard was not just that it defined the unit of account, but that it operated throughout almost the entire world. Anthony Trollope tells us in his diaries about his Australian travels in 1872 that a pound of meat, selling in Australia for twopence, would have cost ten pence or even a shilling in the UK. It was this price difference which drove investment and effort into the development of shipboard refrigeration, and opening up of major new markets for Australian meat, at great benefit to the British public. Today we can determine price differences between countries by considering the exchange rate of the day. In twelve months’ time, even a month’s time, however, a totally different situation may prevail, and investments of time and money made on the basis of an opportunity at an exchange rate of the day, may actually perform poorly because of subsequent exchange rate movements. The great advantage of having a single stable world currency is that such currency would have very high information content. It tells people where to invest their time, energy and capital, all around the world, with much greater accuracy and predictability than would otherwise be possible.

Questions 14-17

The reading passage has four sections. Choose the most suitable heading for each section from

the list of headings below.

Write the appropriate numbers in boxes 14-17 on your answer sheet.

Note: There are more headings than sections so you will not use all of them.

i. The Price of Gold

ii. The Notion of Money and its Expression

iii. The Rise of Problematic Modern Currencies

iv. Stable Money Compared to Modern “fiat” Currencies

v. The Effects of Inflation

vi. The Interrelationship of Prices

vii. Stability of modern currencies

14 SECTION I: ……………………….

15 SECTION II: ………………………

16 SECTION III: ………………………

17 SECTION IV: ………………………

Questions 18-21

Using information from the text, match the following causes with a result. Write the

appropriate letters in boxes 18-21 on your answer sheet.

A Oil substitutes become more expensive

B Oil substitutes drop in price

C People developed techniques of transporting it to other places

D More people went to live in Australia

E The price of other things goes down, because fewer people could afford to buy them

F People used gold instead of silver as money

G All prices went up slightly, everywhere

H There is no observable effect

I All prices went down, everywhere

18 The price of Potatoes goes up…

19 The amount of gold available went up………….

20 The amount of gold available went down………….

21 Meat in Australia was cheaper than elsewhere …………….

Questions 22-26

In the reading passage, the writer compared money based on a gold standard, and fiat money. Using the information in the passage, match a phrase A, B or C in the box with the writer’s opinions in each question to show which kind of money is meant. Write the appropriate letter in boxes 22 – 26 on your answer sheet.

A Money based on a gold standard

B Government fiat monopoly currencies

C Both money based on a gold standard and fiat currencies

22 The writer states that it has a clearly defined value ……………

23 The writer states that its value by definition varies over time ………………

24 The writer describes its future value as predictable ……………….

25 The writer knows or can calculate its past value ……………

26 The writer believes it makes international investment easier ………………

Reading Answers

14 Answer: ii

Question type: Matching Headings

Answer location: Paragraph A, line 4 – line 6 & line 10 – line 12

Answer explanation: The first set of selected lines from Paragraph A says that “Money, however, is much more difficult to define because the value of anything is ultimately in the mind of the observer, and such values will change with time and circumstance.” This informs us how the notion of money is difficult to define. Later, in the following lines – “It was called by different names in different countries, but all these supposedly different currencies were rigidly interconnected through their particular definition in terms of a quantity of gold.” – we get that money has various expressions in different places but they are all interconnected. Hence the answer is ii.

15 Answer: vi

Question type: Matching Headings

Answer location: Paragraph B, line 1 – line 2

Answer explanation: The introductory line from the second paragraph or section says that “In economic life the prices of different commodities and services are always changing with respect to each other.” This sentence along with the various examples that follow in the paragraph points out the interrelationship of prices. Hence the answer is vi.

16 Answer: iii

Question type: Matching Headings

Answer location: Paragraph C, line 4 – line 6

Answer explanation: The mentioned lines from Paragraph C says that “Governments printed as much paper money or coinage as they wanted, and the more that was printed, the less each unit of currency was worth. The key problem with these government ‘fiat’ currencies is that their value is not defined; such value is subject to how much money a government cares to print.” This shows that when the government prints modern currencies, they become important even though they are unpredictable and problematic. Hence the answer is iii.

17 Answer: iv

Question type: Matching Headings

Answer location: Paragraph D, line 1 – line 2

Answer explanation: In the beginning of Paragraph D, it is stated that “The great advantage of the 19th century gold standard was not just that it defined the unit of account, but that it operated throughout almost the entire world.” Later, in the paragraph, the author also adds that “The great advantage of having a single stable world currency is that such currency would have very high information content.” As the advantages of stable money of the 19th century are compared to the modern ‘fiat’ currencies in this paragraph, the answer is iv.

18 Answer: E

Question type: Matching Sentence Endings

Answer location: Paragraph B, line 4 – line 5

Answer explanation: The mentioned lines from Paragraph B says that “Because of the high price of potatoes, prices of other things will decline, as demand for them declines.” This explains that when the price of potatoes goes up, the price of other things goes down (declines) as the majority of people cannot afford to buy them and the demand declines. Hence the answer is E.

19 Answer: G

Question type: Matching Sentence Endings

Answer location: Paragraph B, line 16 – line 18

Answer explanation: The stated lines from Paragraph B says that “When new gold rushes followed in South Africa and again in Australia, in the 1880s and 1890s, the general price level increased, gently, around the world, as there was more money in circulation.” We can conclude that when the amount of gold available went up due to the new gold rush, the prices would increase slightly (gently) everywhere (around the world). Hence the answer is G.

20 Answer: I

Question type: Matching Sentence Endings

Answer location: Paragraph B, line 14 – line 16

Answer explanation: The specified lines from Paragraph B says that “If gold supplies diminished, as they did when the 1850s gold rushes in California and Australia were finishing, then deflation (a general price level decrease] would set in.” So, it is clear that if the amount of gold available went down (diminished), the prices of everything would go down or decrease as well. Hence the answer is I.

21 Answer: C

Question type: Matching Sentence Endings

Answer location: Paragraph D, line 3 – line 6

Answer explanation: The following lines from Paragraph D says that “…a pound of meat, selling in Australia for twopence, would have cost ten pence or even a shilling in the UK. It was this price difference which drove investment and effort into the development of shipboard refrigeration, and opening up of major new markets for Australian meat, at great benefit to the British public.” It means that the meat in Australia was cheaper than elsewhere and so people developed techniques of transporting it like shipboard refrigeration to other places. Hence the answer is C.

22 Answer: A