Chapter 3 questions

Rank the following assets form most liquid to least liquid: Checking account deposits Houses Currency Automobiles Savings Deposits Common Stock

1.Currency 2.Checking account 3.deposits 4.Savings deposits 5.Common Stock 6.Automobiles 7.Houses

Why were people in the United States in the 19th century sometimes willing to be paid by check rather than with gold, even though they knew there was a possibility that the check might bounce?

Because a check was so much easier to transport than gold, people would frequently rather be paid by check even if there was a possibility that the check might bounce. In other words, the lower transactions costs involved in handling checks made people more willing to accept them

Was money a better store of value in the 1950s than in the 1970s? Why or why not? In which period would you have been more willing to hold money?

Because money was losing value at a slower rate (the inflation rate was lower) in the 1950s than in the 1970s, it was a better store of value then, and you would have been willing to hold more of it.

In Brazil, a country that underwent a rapid inflation before 1994, many transactions were conducted in dollars rather than in reals, the domestic currency. Why?

Because of the rapid inflation in Brazil, the domestic currency, the real, was a poor store of value. Thus many people preferred to hold dollars, which were a better store of value, and used them in their daily shopping

Why did cavemen not need money?

Cavemen did not need money. In their primitive economy, they did not specialize in producing one type of good and they had little need to trade with other cavemen

In April 2009 the growth rate of M1 fell to 6.1%, while the growth rate of M2 rose to 10.3%. In September 2013, the year over year growth rate of M1 money supply was 6.5%, while the growth rate of M2 money supply was bout 8.3%. How should Federal Reserve policymakers interpret these changes in the growth rates of M1 & M2?

During the period in question, the M1 growth rate increased by 17 percentage points, while the M2 growth rate increased by only 3 percentage points. Although both measures are moving in the same direction, the magnitude of the difference in growth rates between the two makes it difficult to judge the appropriateness of monetary policy by just looking at the money supply measures alone. For instance, if one focused just on the M2 money supply, knowing the economy was in severe economic contraction would suggest that the growth rate of M2 perhaps should be even higher than the 3 percentage point increase over this time. On the other hand, if one just focused on the M1 growth increase of 17 percentage points, this may seem alarmingly high and suggest an inflationary problem in the future

In prison, cigarettes are sometimes used amount inmates as a form of payment. How is it possible for cigarettes to solve the double coincidence of wants problem even if a prisoner does not smoke

Even if he or she is a non-smoker, since the prisoner knows that others in the prison will accept cigarettes as a form of payment, they themselves would be willing to accept cigarettes as a form of payment. So, rather than prisoners having to barter and trade favors, cigarettes satisfy the double coincidence of wants in that both parties to a trade stand ready to use them to "purchase" goods or services.

Which of the federal reserves measures of the monetary aggregates-M1 or M2-is composed of the mos liquid assets?Which is the larger measure

M1 contains the most liquid assets. M2 is the largest measure

Why have some economists described money during a hyperinflation as a "hot potato" that is quickly passed from one person to another?

Money loses its value at an extremely rapid rate in hyperinflation, so you want to hold it for as short a time as possible. Thus money is like a hot potato that is quickly passed from one person to another

Suppose a researcher discovers that a measure of the total amount of debt in the U.S economy over the past 20 years was a better predictor of inflation and the business cycle than M1 or M2. Does this discovery mean that we should define money as equal to the total amount of debt in the economy?

Not necessarily. Although the total amount of debt has predicted inflation and the business cycle better than M1 or M2, it may not be a better predictor in the future. Without some theoretical reason for believing that the total amount of debt will continue to predict well in the future, we may not want to define money as the total amount of debt.

Why is simply counting currency an inadequate measure of money?

Since a lot of other assets have liquidity properties that are similar to currency but can be used as money to purchase goods and services, not counting them would understate an economy's access to liquidity for transactions purposes. For this reason, counting assets such as checking deposits or savings accounts more accurately reflects the stock of assets that can be considered money

In Greece why was gold a more likely candidate for use as money than wine?

Wine is more difficult to transport than gold and is also more perishable. Gold is thus a better store of value than wine and also leads to lower transactions cost. It is therefore a better candidate for use as money.

Assume that you are interested in earning some return on the idle balances you usual keep in your checking

Your actions will reduce your checking account balance and increase your holdings of money market mutual fund shares. Considering this transaction only, M1 will decrease as one of its components decreased. M2 will remain constant, as M2 is composed of all items that add up to M1 plus some other types of money that are not so liquid to be considered part of M1. One of these categories is money market mutual fund shares. The decrease in your checking account balance is offset by the increase in money market mutual fund shares, and therefore M2 remains constant.

for the following assets describe which monetary aggregates (M1 & M2) include them a.Currency b.Money market mutual c.Small-denomination time desposits d. Checkable deposits

a. M1 and M2, b. M2, c. M2, d. M1 and M2.