Money and Banking Chapter 3

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Which of the following is NOT a function of money?

It enables barter trade.

Which of the following statements correctly identifies a disadvantage of fiat money?

It is possible to create counterfeit fiat money.

Which of the following functions of money encourages specialization in the production of goods and services?

Medium of exchange

Credit cards are

not counted as money because they represent borrowings and not payments.

Aaron takes $100 out of his checking account and puts it in his savings account while Biff withdraws $200 from his money-market mutual fund in the form of cash. The total effect is that M1 and M2 .

rises by $100; is unchanged

In the United States, coins are produced by _____ and distributed around the country by _____.

the U.S. Mint; the Federal Reserve.

When money is used as a value in which prices are denoted, money is serving the role of a

unit of account.

Which of the following statements is true?

Assets counted in M1 are more liquid than assets counted in M2.

Which of the following monetary assets is likely to be most liquid?

Currency

Which of the following statements correctly differentiates between commodity money and fiat money?

Fiat money has value decreed by the government, while commodity money is valued because of the material it is made of.

Which of the following monetary assets is likely to be least liquid?

Funds held as certificate of deposits

Which of the following statements correctly identifies a difference between inside money and outside money?

Inside money is created in the private sector, while outside money is created by the government or by nature.

Which of the following statements is true of commodity money?

Large quantities of commodity money may not be portable.

Which of the following statements correctly identifies an advantage of checking accounts over cash?

Lost or stolen checks cannot be used unless they have the account holder's signature.

Suppose your bank lowers its minimum balance requirement by $500. So you take $500 out of your checking account and put it into a money market deposit account. What is the overall effect on M1 and M2?

M1 falls by $500, M2 is unchanged.

M2 includes

M1.

An example of inside money is

a traveler's check.

Gresham's Law states that

bad money drives out good money.

M1 consists of

coins, paper currency, travelers checks, and amounts in checking accounts.

If money is gold or silver, it is called _____ money

commodity

Money whose value is determined by its value as a material is referred to as

commodity money.

A mechanism by which a short-term loan is made, allowing a shopper to purchase goods or services today and pay for it at a later date, is known as a _____ card.

credit

The demand for U.S. currency increased in the early 1990s mainly because

demand increased from Eastern Europe.

When two producers are trading without money, each must want what the other produces. This requirement is referred to as

double coincidence of wants.

Money that has value in large part by the government's proclamation is known as

fiat money.

U.S. currency is currently

fiat money.

Most U.S. currency is held by

foreigners.

The liquidity of a monetary asset is

how quickly and easily it can be used to purchase goods and services.

An inflation rate exceeding 50 percent per month is referred to as

hyperinflation.

Currently in the United States, money in checking accounts is

inside money.

Money that is created in the private sector, such as checking accounts at banks, is referred to as:

inside money.

The law states that a lender must accept money in the repayment of debts. This means that money is a

legal tender.

Inflation affects money by

limiting money's role as a store of value.

The reason why people are putting more funds in checking and savings account rather than in time deposits is that

long-term interest rates have declined in recent years, relative to short term interest rates.

Higher the rate of inflation

lower will be the will to hold money.

When people use money by trading it for goods and services, money is serving the role of a

medium of exchange.

A measure of the total supply of money in the economy is referred to as

monetary aggregate.

Dividing the amount of U.S. currency in circulation by the number of people in the United States shows that, on an average, each person holds almost $3,000 in cash. The most important explanation for this remarkably large sum is that

most of the cash is circulating in foreign countries.

The set of mechanisms used for making transactions is called the

payments system.

Under the fiat money system, the revenue that the government makes on every coin issued is referred to as

seignorage revenue.

When you buy something one day and pay for it later, the repayment you make is denoted in terms of money. In this case, money is serving the role of a

standard of deferred payment.

When people keep money for some period instead of spending it or investing it, money is serving the role of a

store of value.

A type of inside money that allows a shopper to prepay some amount and then spend it at her will is a _____ card.

stored-value

The Fed measures the money supply following a system based mainly on

the liquidity and size of various bank accounts.

Costs of trading are referred to as _____ costs.

transactions

As a medium of exchange, money makes exchanges easier by reducing

transactions costs.


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