Iraqi Currency
After the invasion of Iraq and the removal of Saddam Hussein, a provisional government was established to help get the country back on its feet. As part of the process, the government had to revise the country's monetary system and currency, which created a crisis for the Iraqi dinar.
No matter what a particular society uses for money, its primary purpose is to enable a person or organization to transform a desire into an action. These desires may be for entertainment actions, such as party expenses; operating actions, such as paying for rent, utilities, or employees; investing actions, such as buying property or equipment; or financing actions, such as starting or growing a business. Money serves three important functions: as a medium of exchange, a measure of value, and a store of value.
Read the case below and answer the questions that follow.
After the invasion of Iraq and the removal of Saddam Hussein, a provisional government was established to help the country to get back on its feet. Part of the process of establishing a new Iraqi government involved revising its monetary system and currency. The government released a new form of the Iraqi dinar (IQD into circulation after it was redesigned and Saddam Hussein's picture was removed. The new bills were also printed in different colors that were more difficult to counterfeit than the currency from the old regime. More than 10,000 tons of old notes were destroyed after the circulation of the new currency.
Since about 1,160 dinars equal 1 U.S. dollar, the new dinar is printed in denominations of 50, 250, 1,000, 5,000, 10,000, and 25,000. When the currency was redesigned, small denominations were more popular because many retailers would not accept larger notes as payment, in part because of rumors that banks in Iraq would no longer accept 10,000 dinar notes. Therefore, the country had to print millions of 250 dinar notes so that Iraqi citizens could spend money to help revive the country's economy.
Although some Iraqis would like to tie the dinar to the U.S. dollar, few governments have been able to take this approach without major drawbacks. If the dinar is fixed to the U.S. dollar, the country could suffer even more instability when the U.S. dollar varies against other currencies. Of course, there is the concern that tying the dinar to the U.S. dollar might also confirm the U.S. is involved in imperialism. Ultimately, the dinar must become a symbol that the Iraqi people can trust.
1. Iraqi's financial system can best be described as one based on _____.
a fiat system
"IOUs" that people trade
limited-supply commodities
linked to gold and other precious metals
2. Many retailers would not accept large denominations. The retailers were concerned about which of the following functions of money?
Store of value
Measure of value
Medium of exchange
Divisibility
Portability
3. Tying the dinar to the U.S. dollar might cause the value of the dinar to fluctuate with the value of the dollar. This causes issues with which of the following characteristics of money?
Stability
Acceptability
Portability
Divisibility
Durability
4. The new dinars were printed in color. This addressed which of the following characteristics of money?
Difficulty to counterfeit
Acceptability
Foreign exchange rate
Stability
Portability
5. Which of the following most likely explains why Iraq adopted a new monetary system?
It was necessary to build confidence in the dinar for it to remain as a store of value.
People were trading items that were no longer needed.
There were concerns about the portability of the old system.
There needed to be a new system with better divisibility.
The old system used materials that weren't very durable.