Currency Puzzle

by Russ Roberts on July 21, 2006

in Podcast

Here’s the puzzle I raised at the end of the Barro podcast. If you’d like to give your answer, go to the Barro podcast page at EconTalk and enter it in the comments section.

An American tourist goes to a remote island for a vacation. The natives live by a barter system-they have no money.  When the tourist tries to pay for his lodging with a check, the owner laughs at first, but then decides that the design on the check is quite attractive and agrees to accept the check in return for lodging. This happens again when the tourist pays for food and some native artwork. The checks are never cashed. They begin to circulate on the island as money, replacing the barter system that had existed before.

If the checks are never cashed, who pays for the vacation of the tourist? Or is it free?

I’ll post an answer (or highlight the best one) next week.

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