ECON330 Chapter 3

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Which of the following is a disadvantage of using checks as a means of​ payment?

All the paper shuffling required to process checks is costly.

Which of the following is not included in the M1 measure of money but is included in the M2 measure of​ money?

Smallminus−denomination time deposits

The components of the U.S. M1 money supply are demand and checkable deposits plus

currency plus travelers checks.

Rank assets from most liquid to least liquid

currency, checking account deposits, savings deposits, common stock, automobile, houses

Ranking assets from most liquid to least​ liquid, the correct order is

currency, savings bond, house

Does money aggregate the following assets?

currency: M1 and M2, money market mutual funds: M2, US T-bills: neither, small denomination time deposits: M2, large cap mutual funds: neither, checkable deposits: M1 and M2

A fall in the level of prices

increases the value of money

Increasing transactions costs of selling an asset make the asset

less liquid

money has three primary functions in the economy:

medium of exchange (distinguishes it from other assets), unit of account, store of value

payments system

method of conducting transactions in the economy (constantly evolving)

what is the most liquid asset

money (no conversion)

Which of the following is not included in the measure of​ M1?

savings deposits

The M1 measure of money includes

traveler's checks

Tim wants to calculate the relative value of oranges and​ apples, and therefore checks the price per pound of each of these goods quoted in currency units. In this​ case, money is being used 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

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

hyperinflation

________ is a flow of earnings per unit of time.

income

When compared to exchange systems that rely on​ money, disadvantages of the barter system​ include:

the requirement of a double coincidence of wants.

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.

the growth rates of M1 and M2 tend to move

together, but with discrepancies

________ 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.

money

A tool used to facilitate​ transactions, store​ wealth, or to be used as a yardstick to compare values

How do checkable deposits differ from demand deposits​?

Demand deposits are those transactions accounts against which an unlimited number of checks can ordinarily be written. Checkable deposits often carry restrictions on transferability.

income

Earnings received from​ working, property​ rentals, entrepreneurship, or the ownership of financial assets.

Which of the following would represent an advantage of gold over cheques as a form of​ money?

Gold has intrinsic value when compared to cheques

Which of the following is a true​ statement?

Income is a flow variable

________ is the narrowest monetary aggregate that the Fed reports.

M1

If an individual redeems a U.S. savings bond for currency

M1 increases and M2 increases

If an individual moves money from a smallminus−denomination time deposit to a demand deposit​ account,

M1 increases and M2 stays the same

Assume that you are interested in earning some return on idle balances you usually keep in your checking account and decide to buy some money market mutual fund shares by writing a check.

M1 will decrease and M2 will stay the same

All else​ equal, ___ is the monetary aggregate composed of the most liquid assets and ___ is the larger measure.

M1, M2

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.

Which of the following is a disadvantage of using fiat money?

Public authorities may be tempted to produce too much of it

Why are the growth rates of M1 and M2 so​ different?

The components of M2 are rising much more rapidly compared to the components of M1.

savings

The difference between what is earned and what is spent. This adds to total wealth

Why is simply counting currency an inadequate measure of​ money?

There are other liquid assets similar to currency that can be used as money to purchase goods and services.

What is the main disadvantage of moving to e-money or moving to a cashless​ society?

There are problems with security and privacy

debt

What you owelong dash—the accumulation of spending over and above periodic earnings

wealth

What you ownlong dash—the total collection of assets that serve to store value. This includes not only money but also other assets such as​ bonds, common​ stock, art,​ land, furniture,​ cars, and houses

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

smart card

a stored value card that can be loaded with digital cash from a bank account whenever needed

When paper currency is decreed by governments as legal​ tender, legally it must be​ ________.

accepted as payment for debts

When interpreting changes in the growth rates of M1 and​ M2, Federal Reserve policymakers should​ recognize:

an inflationary problem may exist in the future as the growth of M1 to​ 17% is alarmingly high, the growth rate of M2 should be higher than the​ 3% increase shown over this period.

A smart card is the equivalent of

cash

small-denomination time deposits

certificates of deposit with a denomination of less than $100,000 that can be redeemed only at a fixed maturity date without a penalty

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

________ 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

for a commodity to function effectively as money, it must meet the following criteria:

easily standardized, widely accepted, divisible, easy to carry, not deteriorate quickly

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

An important characteristic of the modern payments system has been the rapidly increasing use of

electronic fund transfers

e-cash

electronic money used on the internet to purchase goods or services

In​ prison, cigarettes are sometimes used among inmates as a form of payment. All of the following explain how cigarettes solve the​ "double coincidence of​ wants" problem, even if a prisoner does not​ smoke, except​:

exchanging cigarettes for other goods and services increases transaction costs

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

Paper currency that has been declared legal tender but is not convertible into coins or precious metals is called​ ________ money.

fiat

medium of exchange

form of currency used to pay for goods and services

money is a stock, or a certain amount at a

given point in time

In​ Brazil, a country that underwent a rapid inflation before​ 1994, many transactions were conducted in dollars rather than in​ reals, the domestic currency. During this​ period, the US dollar served what property or properties in​ Brazil?

unit of account, medium of exchange, store of value

The total collection of pieces of property that serve to store value is a​ person's

wealth

the word money is often used synonymously with

wealth (the total collection of pieces of property that serve to store value: includes bonds, common stock, art, land...) and income (a flow of earnings per unit of time)

Smallminus−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

economists define money as

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

Compared to​ checks, paper currency and coins have the major drawbacks that they

are easily stolen

M2

assets that are not quite as liquid as M1: money market deposit accounts, mutual funds, savings deposits...)

Which of the following is included in both M1 and​ M2?

currency

when most people talk about money, they are referring to

currency (paper money and coins)

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

check

instruction from you to your bank to transfer money from your account to someone else (efficient for large amounts, time consuming, costly)

Relate the following flow variables to its corresponding stock​ variable:

investment-capital stock, deficit spending-debt, quantity supplied-inventory, profits-equity, saving per month-wealth

All of the following are necessary criteria for a commodity to function as money except

it must deteriorate quickly.

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

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

liquidity

stock variable

measured at a point in time, snapshot (debt, money, savings deposits, wealth)

flow variable

measured per unit of time (income)

unit of account

measures value in the economy

Brooke accepts money in exchange for performing her daily tasks at her​ office, since she knows she can use that money to buy goods and services. In this​ case, money is being used 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

To an​ economist, ________ is anything that is generally accepted in payment for goods and services or in the repayment of debt.

money

commodity money

money made of precious metals or other valuable commodity (heavy and hard to transport)

During​ hyperinflations,

money no longer functions as a good store of value and people may resort to barter transactions on a much larger scale.

e-money

money that exists only in electronic form

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.

fiat money

paper currency decreed by governments as legal tender but not convertible into coins or precious metals (easily stolen and expensive to transport in large amounts)

currency includes

paper money and coins

electronic payment

paying bills online (inexpensive and fast)

store of value

repository of purchasing power over time

In ancient​ Greece, what property made gold a more likely candidate for use as money than​ wine? Gold's property as a _____________ made it a more likely candidate for use as money when compared to wine.

store of value

Maria is currently pregnant. She expects her expenditures to increase in the future and decides to increase the balance in her savings account. In this​ case, money is being used as a

store of value

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

What property would lead individuals to hold more money in the 1990s than in the​ 1970s?

store of value

The currency component includes paper money and coins held in​ ________.

the hands of the nonbank public

hyperinflation

the inflation rate exceeds 50% per month

monetary aggregates

the measured of money supply agreed on by the Fed

M1

the most liquid assets including currency, deposits, and travelers checks

When we say that money is a stock​ variable, we mean that

the quantity of money is measured at a given point in time


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