ECON330 Chapter 3
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