ECON 2035 Chapter 3
Since it does not have to be converted into anything else to make purchases, ________ is the most liquid asset
Money
To an economist, ________ is anything that is generally accepted in payment for goods and services or in the repayment of debt
Money
Which of the following statements best explains how the use of money in an economy increases economic efficiency?
Money increases economic efficiency because it decreases transactions costs
________ are the time and resources spent trying to exchange goods and services
Transaction costs
Compared to an economy that uses a medium of exchange, in a barter economy
Transaction costs are higher
An electronic payments system has not completely replaced the paper payments system because of all of the following reasons except
Transportation costs
Dennis notices that jackets are on sale for $99. In this case money is functioning as a
Unit of account
When money prices are used to facilitate comparisons of value, money is said to function as a
Unit of account
The evolution of the payments system from barter to precious metals, then to fiat money, then to checks can best be understood as a consequence of
innovations that reduced the costs of exchanging goods and services
Monetary aggregates are
measures of the money supply reported by the Federal Reserve
Recent financial innovation makes the Federal Reserve's job of conducting monetary policy
more difficult, since the Fed no longer knows what to consider money
In explaining the evolution of money
new forms of money evolve to lower transaction costs
The decade during which the growth rates of monetary aggregates diverged the most is
the 1990s
Whatever a society uses as money, the distinguishing characteristic is that it must
Be generally acceptable as payment for goods and services or in the repayment of debt
________ is the relative ease and speed with which an asset can be converted into a medium of exchange
Liquidity
________ is the narrowest monetary aggregate that the Fed reports
M1
If an individual uses money from a demand deposit account to purchase a U.S. savings bond,
M1 decreases and M2 decreases
If an individual moves money from a demand deposit account to a money market deposit account,
M1 decreases and M2 stays the same
If an individual redeems a U.S. savings bond for currency
M1 increases and M2 increases
If an individual moves money from a money market deposit account to currency,
M1 increases and M2 stays the same
If an individual moves money from a small-denomination time deposit to a demand deposit account,
M1 increases and M2 stays the same
If an individual moves money from a savings deposit account to a money market deposit account,
M1 stays the same and M2 stays the same
If an individual moves money from currency to a demand deposit account,
M1 stays the same and M2 stays the same
Of the following, the largest is
M2
Kevin purchasing concert tickets with his debit card is an example of the ________ function of money
Medium of exchange
Of money's three functions, the one that distinguishes money from other assets is its function as a
Medium of exchange
If peanuts serve as a medium of exchange, a unit of account, and a store of value, then peanuts are
Money
Ranking assets from most liquid to least liquid, the correct order is (house, currency, savings bonds)
Currency, savings bonds, house
Small-denomination time deposits refer to certificates of deposit with a denomination of less than
$100,000
If there are five goods in a barter economy, one needs to know ten prices in order to exchange one good for another. If, however, there are ten goods in a barter economy, then one needs to know ________ prices in order to exchange one good for another
45
If there are four goods in a barter economy, then one needs to know ________ prices in order to exchange one good for another
6
The M1 measure of money includes
traveler's checks
Of the following assets, the least liquid is
A house
When paper currency is decreed by governments as legal tender, legally it must be
Accepted as payments for debts
Compared to checks, paper currency and coins have the major drawbacks that they
Are easily stolen
Which of the following sequences accurately describes the evolution of the payments system?
Barter, coins made of precious metals, paper currency, checks, electronic funds transfers
A smart card is the equivalent of
Cash
________ money could be used for some other purpose other than as a medium of exchange, for example, gold coins could be melted down and turned into gold jewelry
Commodity
A disadvantage of ________made from precious metals is that it is very heavy and hard to transport from one place to another
Commodity money
As the payments system evolves from barter to a monetary system,
Commodity money is likely to precede the use of paper currency
Why are most of the U.S. dollars held outside of the United States?
Concern about high inflation eroding the value of their own currency causes many people in foreign countries to hold U.S. dollars as a hedge against inflation risk.
Which of the following is not a form of e-money?
Credit card
Which of the following is included in both M1 and M2?
Currency
What are the criteria for a commodity to function as money?
Divisible, easy to carry, and widely accepted
For a commodity to function effectively as money it must be
Easily standardized, making it easy to ascertain its value
When economists say that money promotes ________, they mean that money encourages specialization and the division of labor
Efficiency
People hold money even during inflationary episodes when other assets prove to be better stores of value. This can be explained by the fact that money is
Extremely liquid
If the price level doubles, the value of money
Falls by 50%
Paper currency that has been declared legal tender but is not convertible into coins or precious metals is called ________ money
Fiat
Because inflation in Germany after World War I sometimes exceeded 1,000 % per month, one can conclude that the German economy suffered from
Hyperinflation
If merchants in the country Zed choose to close their doors, preferring to be stuck with rotting merchandise rather than worthless currency, then one can conclude that Zed is
Hyperinflation
Money no longer functions as a good store of value and people may resort to barter transactions on a much larger scale during what?
Hyperinflation
An individual's annual salary is her
Income
Is money or income a flow variable?
Income
________ is a flow of earnings per unit of time
Income
The conversion of a barter economy to one that uses money
Increases efficiency by reducing transactions
A fall in the level of prices
Increases the value of money
As a store of value, money
Is a way of saving for future purchases
Increasing transactions costs of selling an asset make the asset
Less liqiuid
The M2 monetary aggregate contains everything that is in M1 plus other assets that are highly ________ (can be turned into cash quickly at very little cost)
Liquid
The difference between money and income is that
Money is a stock and income is a flow
Which of the following is included in M2 but not in M1?
Money market mutual fund shares (retail)
________ is used to make purchases while ________ is the total collection of pieces of property that serve to store value
Money; wealth
Currency includes
Paper money and coins
Although ________ currency is lighter than coins made of metals, a disadvantage arising from modern technology is the ease of ________
Paper; counterfeiting
The evolution of the payments system from barter to precious metals, then to fiat money, then to checks can best be understood as a consequence of the fact that
Precious metals were difficult to carry and transport
Money ________ transaction costs, allowing people to specialize in what they do best
Reduces
Because it is a unit of account, money
Reduces the number of prices that need to be calculated
Which of the following is not included in the monetary aggregate M2?
Savings bonds
Which of the following is not included in the measure of M1?
Savings deposits
Which of the following is not included in the M1 measure of money but is included in the M2 measure of money?
Small-denomination time deposits
Patrick places his pocket change into his savings bank on his desk each evening. By his actions, Patrick indicates that he believes that money is a
Store of value
Even economists have no single, precise definition of money because
The "money-ness" or liquidity of an asset is a matter of degree
What factors have slowed down the movement to a system where all payments are made electronically?
The equipment necessary to set up the system is expensive, security of the information, and privacy concerns are issues that need to be addressed before an electronic payments system will be widely accepted.
The currency component includes paper money and coins held in
The hands of the nonbank public
The payments system is
The method of conducting transactions in the economy
When we say that money is a stock variable, we mean that
The quantity of money is measured at a given point in time
When compared to exchange systems that rely on money, disadvantages of the barter system include:
The requirement of double coincidence of wants
Which of the following statements accurately describes the two measures of the money supply?
The two measures do not move together, so they cannot be used interchangeably by policymakers.
All but the most primitive societies use money as a medium of exchange, implying that
The use of money is economically efficient
A problem with barter exchange when there are many goods is that in a barter system
There exists a multiple number of prices for each good
Introduction of checks into the payments system reduced the costs of exchanging goods and services. Another advantage of checks is that
They provide convenient receipts for purchases
Explain how cigarettes could be called "money" in prisoner-of-war camps of World War II
They served as the medium of exchange because individuals did exchange items for cigarettes. They served as a unit of account because prices were quoted in terms of the number of cigarettes required for the exchange. They served as a store of value because an individual would be willing to save their cigarettes even if they did not smoke because they believed that they could exchange the cigarettes for something that they did want at some time in the future
A person's house is part of her
Wealth
The total collection of pieces of property that serve to store value is a person's
Wealth
In a barter economy the number of prices in an economy with N goods is
[N(N - 1)]/2
A hyperinflation is
a period of extreme inflation generally greater than 50% per month
The other checkable deposits component of the M1 measure reported by the Federal Reserve includes
automatic transfer from savings accounts
Compared to an electronic payments system, a payments system based on checks has the major drawback that
checks take longer to process, meaning that it may take several days before the depositor can get her cash
The components of the U.S. M1 money supply are demand and checkable deposits plus
currency plus travelers checks
An important characteristic of the modern payments system has been the rapidly increasing use of
electronic fund transfers