M&B Chapter 3
________ is the narrowest monetary aggregate that the Bank of Canada reports. A) M0 B) M1+ C) M2 D) M3
b
________ is the relative ease and speed with which an asset can be converted into a medium of exchange. A) Efficiency B) Liquidity C) Deflation D) Specialization
b
) Increasing transactions costs of selling an asset make the asset ________. A) more valuable B) more liquid C) less liquid D) more moneylike
c
A fall in the level of prices ________. A) does not affect the value of money B) has an uncertain effect on the value of money C) increases the value of money D) reduces the value of money
c
Because inflation in Germany after World War I sometimes exceeded 1000 percent per month, one can conclude that the German economy suffered from ________. A) deflation B) disinflation C) hyperinflation D) superdeflation
c
E-cash is used for payments ________. A) that are always secure B) that are very important C) on the internet D) in any transaction
c
A person's house is part of her ________. A) money B) income C) liabilities D) wealth
d
) In a barter economy the number of prices in an economy with N goods is ________. A) [N(N - 1)]/2 B) N(N/2) C) 2N D) N(N/2) - 1
a
A disadvantage of ________ is that it can be very heavy and hard to transport from one place to another. A) commodity money B) fiat money C) electronic money D) paper money
a
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
As the payments system evolves from barter to a monetary system, ________. A) commodity money is likely to precede the use of paper currency B) transaction costs increase C) the number of prices that need to be calculated increase rather dramatically D) specialization decreases
a
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
Compared to cheques, paper currency and coins have the major drawbacks that they ________. A) are easily stolen B) are hard to counterfeit C) are not the most liquid assets D) must be backed by gold
a
Currency includes ________. A) paper money and coins B) paper money, coins, and cheques C) paper money and cheques D) paper money, coins, cheques, and savings deposits
a
For a commodity to function effectively as money it must be ________. A) easily standardized, making it easy to ascertain its value B) difficult to make change C) deteriorate quickly so that its supply does not become too large D) hard to carry around
a
If an individual moves money from a money market mutual fund to currency, ________. A) M1+ increases and M2+ stays the same B) M1+ stays the same and M2+ increases C) M1+ stays the same and M2+ stays the same D) M1+ increases and M2+ decreases
a
The currency component includes paper money and coins held in ________. A) bank vaults B) ATMs C) the hands of the nonbank public D) the central bank
c
The evolution of the payments system from barter to precious metals, then to fiat money, then to cheques can best be understood as a consequence of ________. A) government regulations designed to improve the efficiency of the payments system B) government regulations designed to promote the safety of the payments system C) innovations that reduced the costs of exchanging goods and services D) competition among firms to make it easier for customers to purchase their products
c
If an individual redeems a Canada savings bond for currency, ________. A) M1+ stays the same and M2 decreases B) M1+ increases and M2 increases C) M1+ increases and M2 stays the same D) M1+ stays the same and M2 stays the same
b
If there are four goods in a barter economy, then one needs to know ________ prices in order to exchange one good for another. A) 8 B) 6 C) 5 D) 4
b
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
Compared to an electronic payments system, a payments system based on cheques has the major drawback that ________. A) cheques are less costly to process B) cheques 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
Currency is defined as ________. A) anything accepted for payment of goods and services B) paper money and coins C) a unit of account D) foreign exchange
b
Defining money becomes ________ difficult as the pace of financial innovation ________. A) less; quickens B) more; quickens C) more; slows D) more; stops
b
Dennis notices that jackets are on sale for $99. In this case money is functioning as a ________. A) medium of exchange B) unit of account C) store of value D) payments-system ruler
b
During hyperinflations, ________. A) the value of money rises rapidly B) money no longer functions as a good store of value and people may resort to barter transactions on a much larger scale C) middle-class savers benefit as prices rise D) money's value remains fixed to the price level; that is, if prices double so does the value of money
b
During the past two decades an important characteristic of the modern payments system has been the rapidly increasing use of ________. A) cheques and decreasing use of currency B) electronic payments C) commodity monies D) fiat money
b
________ is a flow of earnings per unit of time. A) Income B) Money C) Wealth D) Currency
a
What is a cheque? what are their advantages and disadvantages?
A cheque is an instrument used to transfer money from your account to someone else's account when she deposits the cheque. Advantages: Reduces transportation costs associated with the payments system as they frequently cancel each other. Also, they make the transactions for large amounts much easier as they can be written for any amount up to the balance in the account. Finally loss from theft is greatly reduced and they provide convenient receipts for purchases. Disadvantages: It takes time to get cheques from one place to another, it takes several days for a cheque to be processed from your bank, and the paper work required to process them is costly.
Explain the concepts of wealth and income and how they relate to the concept of money.
Answer: Non-economists often use money synonymously with wealth or income. Wealth is a stock variable that describes the total collection of property that is used to store value. Income is a flow of earnings over some period of time. Money is a stock variable; it is a certain amount at a point of time and can be used in the payment of goods and services.
Economists say that money is a store of value. since there are other assets that are a more desirable store of money, why do people hold money at all?
Answer: People hold money although it is not the best store of value, because of an important economic feature of money, liquidity. Liquidity is a highly desired property of assets. Liquidity measures how easily and fast an asset can be converted into a medium of exchange. Since money is a medium of exchange it is the most liquid asset, and thus, highly desirable although it is not the best store of value.
Why are people are willing to hold money even if it is not the most attractive store of value?
Answer: The answer to this question relates to the economic concept of liquidity, the relative ease and speed with which an asset can be converted into a medium of exchange. Money is the most liquid asset of all because it is the medium of exchange; it does not have to be converted into anything else in order to make purchases. Other assets involve transaction costs when they are converted into money.
What are electronic payments? how do they reduce transaction costs? by how much?
In the past when paying bills you had to mail a cheque but now banks provide a website in which you log on, make a few clicks and make the payment that is transmitted electronically. You can even avoid logging in as reoccurring bills can be automatically deducted from your bank account. Electronic payments reduce transaction costs as you do not have to pay a stamp to send a cheque and also you save time paying your bills electronically. Estimated cost savings when a bill is paid electronically rather than a cheques exceed one dollar.
Explain the evolution of the payments system. Is the system headed towards a cashless society?
Societies begin with a barter system and then introduce commodity money which was replaced with paper money. Fiat money, is legal tender, based on the backing of an authority — typically the government. Cheques and electronic payments were the next evolution in the system. A cashless society is unlikely due to several concerns: 1) it is expensive to set up and 2) it raises privacy and security concerns.
Explain how cigarettes could be called "money" in prisoner-of-war camps of World War II.
The cigarettes performed the three functions of money. 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.
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.
Can packs of cigarettes be used as commodity money?
We must see whether cigarettes satisfy the 5 criteria for a commodity to function effectively as money: 1. Easily standardized—yes they are, cigarettes come is packs. 2. Widely accepted—yes, if they are used in a setting such as WW II prisoners of war. 3. Divisible—yes, packs of cigarettes are divisible to single cigarettes. 4. Easy to carry—yes, cigarettes are lightweight. 5. Must not deteriorate quickly—yes, cigarettes do not deteriorate easily.
A hyperinflation is ________. A) a period of extreme inflation generally greater than 50 percent 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 smart card is the equivalent of ________. A) cash B) savings bonds C) savings deposits D) certificates of deposit
a
All but the most primitive societies use money as a medium of exchange, implying that ________. A) the use of money is economically efficient B) barter exchange is economically efficient C) barter exchange cannot work outside the family D) inflation is not a concern
a
If an individual moves money from a notice deposit at a bank to a deposit account at a credit union, ________. A) M2 decreases and M2+ stays the same B) M2 decreases and M2+ increases C) M2 increases and M2+ stays the same D) M2 increases and M2+ increases
a
Introduction of cheques into the payments system reduced the costs of exchanging goods and services. Another advantage of cheques is that ________. A) they provide convenient receipts for purchases B) they can never be stolen C) they are more widely accepted than currency D) the funds from a deposited cheque are available for use immediately
a
Kevin purchasing concert tickets with his debit card is an example of the ________ function of money. A) medium of exchange B) unit of account C) store of value D) specialization
a
Monetary aggregates are ________. A) measures of the money supply reported by the Bank of Canada B) measures of the wealth of individuals C) never redefined since "money" never changes D) reported by the Department of Finance annually
a
Money ________ transaction costs, allowing people to specialize in what they do best. A) reduces B) increases C) enhances D) eliminates
a
Money is ________. A) anything that is generally accepted in payment for goods and services or in the repayment of debt B) a flow of earnings per unit of time C) the total collection of pieces of property that are a store of value D) always based on a precious metal like gold or silver
a
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 all of the following except ________. A) perfectly liquid B) a unique good for which there are no substitutes C) the only thing accepted in economic exchange D) backed by gold
a
Since it does not have to be converted into anything else to make purchases, ________ is the most liquid asset. A) money B) stock C) artwork D) gold
a
The payments system is ________. A) the method of conducting transactions in the economy B) used by union officials to set salary caps C) an illegal method of rewarding contracts D) used by your employer to determine salary increases
a
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
When compared to exchange systems that rely on money, disadvantages of the barter system include ________. A) the requirement of a double coincidence of wants B) lowering the cost of exchanging goods over time C) lowering the cost of exchange to those who would specialize D) encouraging specialization and the division of labor
a
When money prices are used to facilitate comparisons of value, money is said to function as a ________. A) unit of account B) medium of exchange C) store of value D) payments-system ruler
a
Which of the following is included in both M1+ and M2? A) Currency B) Savings deposits C) Small-denomination time deposits D) Money market deposit accounts
a
Which of the following sequences accurately describes the evolution of the payments system? A) Barter, coins made of precious metals, paper currency, cheques, electronic funds transfers B) Barter, coins made of precious metals, cheques, paper currency, electronic funds transfers C) Barter, cheques, paper currency, coins made of precious metals, electronic funds transfers D) Barter, cheques, paper currency, electronic funds transfers
a
A problem with barter exchange when there are many goods is that in a barter system ________. A) transactions costs are minimized B) there exists a multiple number of prices for each good C) there is only one store of value D) exchange of services is impossible
b
An individual's annual salary is her ________. A) money B) income C) wealth D) liabilities
b
In the country of Moneyland the law allows you to repay mortgage in rocks. Thus, ________. A) Moneyland is a poor country B) rocks in this country are considered as money C) money is scarce D) Moneyland is a developing country
b
Income is a ________ and wealth is a ________. A) stock; flow B) flow; stock C) variable; constant D) constant; variable
b
Money is ________. A) the same as currency B) anything that is generally accepted in payment of goods or services or in the repayment of debts C) not used as a unit of account D) defined as paper money and coins
b
Paper currency that has been declared legal tender but is not convertible into coins or precious metals is called ________ money. A) commodity B) fiat C) electronic D) funny
b
Ranking assets from most liquid to least liquid, the correct order is ________. A) savings bonds; house; currency B) currency; savings bonds; house C) currency; house; savings bonds D) house; savings bonds; currency
b
The M1+ measure of money includes ________. A) small denomination time deposits B) chequable deposits C) money market deposit accounts D) money market mutual fund shares
b
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
There is no single precise measure of money or the money supply for economists because ________. A) the government considers money supply statistics to be confidential and refuses to publish them B) deciding what is generally accepted in payment for goods and services or in the repayment of debt is difficult to determine C) economists cannot agree if currency should be considered money D) definitions change all the time
b
Whatever a society uses as money, the distinguishing characteristic is that it must ________. A) be completely inflation proof B) be generally acceptable as payment for goods and services or in the repayment of debt C) contain gold D) be produced by the government
b
Which of the following is not a form of e-money? A) A debit card B) A credit card C) A stored-value card D) A smart card
b
Which of the following is not included in the monetary aggregate M2? A) Currency B) Money market mutual funds C) Personal deposits D) Notice deposits
b
________ are the time and resources spent trying to exchange goods and services. A) Bargaining costs B) Transaction costs C) Contracting costs D) Barter costs
b
Even economists have no single, precise definition of money because ________. A) money supply statistics are a state secret B) the Bank of Canada does not employ or report different measures of the money supply C) the "moneyness" or liquidity of an asset is a matter of degree D) economists find disagreement interesting and refuse to agree for ideological reasons
c
If an individual moves money from a chequing account to a money market mutual fund, ________. A) M1+ decreases and M2+ increases B) M1+ stays the same and M2+ increases C) M1+ decreases and M2+ stays the same D) M1+ increases and M2+ decreases
c
If an individual moves money from currency to a personal deposit account, ________. A) M1+ decreases and M2+ stays the same B) M1+ stays the same and M2+ increases C) M1+ stays the same and M2+ stays the same D) M1+ increases and M2+ stays the same
c
If an individual redeems a Canada savings bond for currency, ________. A) M1+ stays the same and M2++ decreases B) M1+ increases and M2++ increases C) M1+ increases and M2++ stays the same D) M1+ stays the same and M2++ stays the same
c
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 D) loanable funds
c
In explaining the evolution of money, ________. A) government regulation is the most important factor B) commodity money, because it is valued more highly, tends to drive out paper money C) new forms of money evolve to lower transaction costs D) paper money is always backed by gold and therefore more desirable than cheques
c
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 ________. A) medium of exchange B) unit of account C) store of value D) unit of specialization
c
The components of the M1+ monetary aggregate are chequable deposits plus ________. A) currency B) currency plus savings deposits C) currency outside banks D) currency plus money market deposits
c
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
The evolution of the payments system from barter to precious metals, then to fiat money, then to cheques can best be understood as a consequence of the fact that ________. A) paper is more costly to produce than precious metals B) precious metals were not generally acceptable C) precious metals were difficult to carry and transport D) paper money is less accepted than cheques
c
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
When economists say that money promotes ________, they mean that money encourages specialization and the division of labour. A) bargaining B) contracting C) efficiency D) greed
c
When paper currency is decreed by governments as legal tender, legally it must be ________. A) paper currency backed by gold B) a precious metal such as gold or silver C) accepted as payment for debts D) convertible into an electronic payment
c
Which of the following is a true statement? A) Money and income are flow variables. B) Money is a flow variable. C) Income is a flow variable. D) Money and income are stock variables.
c
Which of the following is a true statement? A) The conversion of a barter economy to one that uses money increases efficiency by increasing the cost of exchange. B) The conversion of a barter economy to one that uses money increases efficiency by increasing the cost to those who wish to specialize. C) The conversion of a barter economy to one that uses money increases efficiency by reducing transactions costs. D) The conversion of a barter economy to one that uses money does not increases efficiency.
c
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
Which of the following statements uses the economists' definition of money? A) I plan to earn a lot of money over the summer. B) Betsy is rich—she has a lot of money. C) I hope that I have enough money to buy my lunch today. D) The job with New Company gave me the opportunity to earn more money.
c
An electronic payments system has not completely replaced the paper payments system because of all of the following reasons except ________. A) expensive equipment is necessary to set up the system B) security concerns C) privacy concerns D) transportation costs
d
As a store of value, money ________. A) does not earn interest B) cannot be a durable asset C) must be currency D) is a way of saving for future purchases
d
If an individual moves money from a demand deposit account to a money market mutual fund, ________. A) M1+ decreases and M2 stays the same B) M1+ stays the same and M2+ increases C) M1+ stays the same and M2 stays the same D) M1+ decreases and M2 decreases
d
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 experiencing a ________. A) superdeflation B) hyperdeflation C) disinflation D) hyperinflation
d
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 half
d
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. A) 20 B) 25 C) 30 D) 45
d
Of money's three functions, the one that distinguishes money from other assets is its function as a ________. A) store of value B) unit of account C) standard of deferred payment D) medium of exchange
d
Of the following assets, the least liquid is ________. A) stocks B) travellers cheques C) chequing deposits D) a house
d
Recent financial innovation makes the Bank of Canada's job of conducting monetary policy ________. A) easier, since the Bank of Canada now knows what to consider money B) more difficult, since the Bank of Canada now knows what to consider money C) easier, since the Bank of Canada no longer knows what to consider money D) more difficult, since the Bank of Canada no longer knows what to consider money
d
When we say that money is a stock variable, we mean that ________. A) the quantity of money is measured at a given point in time B) we must attach a time period to the measure C) it is sold in the equity market D) money never loses purchasing power
d
Which of the following is included in M2+ but not in M2? A) Personal deposits B) Demand deposits C) Currency D) Money market mutual funds
d
Which of the following is not included in M1+ but is included in M1++? A) Currency outside banks B) Currency held by banks C) Chequable deposits at banks, TMLs and CUCPs D) Nonchequable deposits at banks, TMLs and CUCPs
d
Which of the following is not included in the M2 measure of money but is included in the M3 measure of money? A) Currency B) Personal deposits C) Demand deposits D) Foreign currency deposits
d
Which of the following is not included in the measure of M2? A) Personal deposits B) Non-personal demand deposits C) Currency D) Foreign currency deposits
d
________ 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