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