Chapter 3 - The Economics of Money, Banking, and Financial Markets

Store of value

-Used to save purchasing power over time -Other assets also serve this function -Money is the most liquid of all assets but loses value during inflation

What are the 3 functions of money?

1. medium of exchange 2. unit of account 3. store of value

hyperinflation

inflation rates exceeds 50%

wealth

the total collection of pieces of property that serve to store value

Which two of the functions of money does NOT Bitcoin have?

unit of account and store of value

Unit of account

used to measure value in the economy and reduces transaction costs

Commodity money

valuable, easily standardized and divisible commodities (ex. precious metals, and cigarettes)

3) ________ is used to make purchases while ________ is the total collection of pieces of property that serve to store value. A) Money; income B) Wealth; income C) Income; money D) Money; wealth

D) Money; wealth

14) If the price level doubles, the value of money A) doubles. B) more than doubles, due to scale economies. C) rises but does not double, due to diminishing returns. D) falls by 50 percent.

D) falls by 50 percent.

19) Which of the following is NOT included in the measure of M1? A) NOW accounts B) demand deposits C) currency D) savings deposits

D) savings deposits

20) Which of the following is NOT included in the M1 measure of money but is included in the M2 measure of money? A) currency B) traveler's checks C) demand deposits D) small-denomination time deposits

D) small-denomination time deposits

Income

flow or earnings per unit of time

A medium of exchange must

1. be easily standardized 2. be widely accepted 3. be divisible 4. be easy to carry 5. not deteriorate quickly

4) ________ is a flow of earnings per unit of time. A) Income B) Money C) Wealth D) Currency

A) Income

15) A hyperinflation is A) a period of extreme inflation generally greater than 50% per month. B) a period of anxiety caused by rising prices. C) an increase in output caused by higher prices. D) impossible today because of tighter regulations.

A) a period of extreme inflation generally greater than 50% per month.

17) A feature of Bitcoin, a new type of electronic money, that make it attractive as a medium of exchange is A) anonymous transactions. B) volatility of value. C) heavy regulations by the central bank. D) wide acceptance by businesses.

A) anonymous transactions.

11) All of the following are necessary criteria for a commodity to function as money EXCEPT A) it must deteriorate quickly. B) it must be divisible. C) it must be easy to carry. D) it must be widely accepted.

A) it must deteriorate quickly

8) Compared to an economy that uses a medium of exchange, in a barter economy A) transaction costs are higher. B) transaction costs are lower. C) liquidity costs are higher. D) liquidity costs are lower.

A) transaction costs are higher.

6) When we say that income is a flow variable, we mean that A) we must attach a time period to the measure for it to make sense. B) it is measured at a given point in time. C) it moves through our hands quickly. D) the value is constantly changing.

A) we must attach a time period to the measure for it to make sense.

2) The total collection of pieces of property that serve to store value is a person's A) wealth. B) income. C) money. D) credit.

A) wealth.

18) ________ is the narrowest monetary aggregate that the Fed reports. A) M0 B) M1 C) M2 D) M3

B) M1

16) Compared to an electronic payments system, a payments system based on checks has the major drawback that A) checks are less costly to process. B) checks take longer to process, meaning that it may take several days before the depositor can get her cash. C) fraud may be more difficult to commit when paper receipts are eliminated. D) legal liability is more clearly defined.

B) checks take longer to process, meaning that it may take several days before the depositor can get her cash.

5) The difference between money and income is that A) money is a flow and income is a stock. B) money is a stock and income is a flow. C) there is no difference—money and income are both stocks. D) there is no difference—money and income are both flows.

B) money is a stock and income is a flow.

13) Because it is a unit of account, money A) increases transaction costs. B) reduces the number of prices that need to be calculated. C) does not earn interest. D) discourages specialization.

B) reduces the number of prices that need to be calculated.

12) When there are many goods in a barter system, A) transactions costs are minimized. B) there are multiple prices for each good. C) there is only one store of value. D) exchange of services is impossible.

B) there are multiple prices for each good.

10) Which of the following statements best explains how the use of money in an economy increases economic efficiency? A) Money increases economic efficiency because it is costless to produce. B) Money increases economic efficiency because it discourages specialization. C) Money increases economic efficiency because it decreases transactions costs. D) Money cannot have an effect on economic efficiency.

C) Money increases economic efficiency because it decreases transactions costs.

9) The conversion of a barter economy to one that uses money A) increases efficiency by reducing the need to exchange goods and services. B) increases efficiency by reducing the need to specialize. C) increases efficiency by reducing transactions costs. D) does not increase economic efficiency.

C) increases efficiency by reducing transactions costs.

7) If peanuts serve as a medium of exchange, a unit of account, and a store of value, then peanuts are A) bank deposits. B) reserves. C) money

C) money

Fiat money was considered convertible into coins or precious metals. TRUE or FALSE

FALSE - it was not convertible

In a barter economy transaction costs are low because people have to satisfy a double coincidence of wants. TRUE or FALSE

FALSE - transaction costs are high

Because of its high volatility, Bitcoin is not considered money. TRUE or FALSE

TRUE

Commodity money functioned as the medium of exchange in all but the most primitive societies. TRUE or FALSE

TRUE

Generally speaking M1 and M2 follow similar patterns. TRUE or FALSE

TRUE

Money is a stock; it is a certain amount at a given point in time. TRUE or FALSE

TRUE

Money is the most liquid of all assets but loses value during inflation. TRUE or FALSE

TRUE

The choice of monetary aggregate is important for policymakers.TRUE or FALSE

TRUE

currency is a too narrow definition for economists. TRUE or FALSE

TRUE

electronic payment

a payment, made over the internet, that allows money to be taken directly from a consumer's bank account

e-cash

a secure and convenient alternative to bills and coins, complements credit, debit, and charge cards and adds convenience and control to everyday cash transactions

Checks

an instruction to your bank to transfer money from your account

Money

anything that is generally accepted as payments for goods or services in the repayment of debts

To an economist, ________ is anything that is generally accepted in payment for goods and services or in the repayment of debt. A) wealth B) income C) money D) credit

c) money

currency

consisting of paper bills and coins, clearly fits this definition and its one type of money

M1 consists of

currency + travelers checks + demand deposits + other checkable deposits

medium of exchange

eliminates the trouble of finding a double coincidence of needs (reduce transaction costs) and promotes specialization

Fiat money

paper money decreed by governments as legal tender

stored-value card

represents money that the holder has on deposit with the issuer

M2 consists of

small denomination time deposits + savings deposits and money market deposit accounts + money market mutual fund shares

Liquidity

the relative ease and speed with each an asset can be converted into a medium of exchange