Econ 2035 Ch3.2

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

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

The conversion of a barter economy to one that uses money

increases efficiency by reducing transactions costs

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

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

it must deteriorate quickly

Increasing transactions costs of selling an asset make the asset

less liquid

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

Since it does not have to be converted into anything else to make purchases, ________ is the most liquid asset

money

During hyperinflations,

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

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.

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

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

the requirement of a double coincidence of wants

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

Liquidity

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

If the price level doubles, the value of money

falls by 50 percent

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

Compared to an economy that uses a medium of exchange, in a barter economy

transaction costs are higher

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

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

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

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

Because inflation in Germany after World War I sometimes exceeded 1,000 % per month, one can conclude that the German economy suffered from

hyperinflation

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

currency; savings bonds; house

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

Of the following assets, the least liquid is

house