ECON 311 Exam 3 (Ch. 3)

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Small-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

If there are four goods in a barter economy, then one needs to know __ prices in order to exchange one good for another.

6

Which of the following statements uses the economists' definition of money? a. I plan to earn a lot of money over the summer b. Betsy is rich - she has a lot of money c. I hope that I have enough money to buy my lunch today d. The job with New Company gave me the opportunity to earn more money

I hope that I have enough money to buy my lunch today

______ is a flow of earnings per unit of time.

Income

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

Liquidity

__ is the narrowest monetary aggregate that the Fed reports.

M1

If an individual moves money from a demand deposit account to a money market deposit account,

M1 decreases and M2 stays the same

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

M1 increases and M2 increases

If an individual moves money from a money market deposit account to currency,

M1 increases and M2 stays the same

If an individual moves money from a small-denomination time deposit to a demand deposit account,

M1 increases and M2 stays the same

If an individual moves money from a savings deposit account to a money market deposit account,

M1 stays the same and M2 stays the same

If an individual moves money from currency to a demand deposit account,

M1 stays the same and M2 stays the same

Of the following, the largest is a. money market deposit accounts b. demand deposits c. M1 d. M2

M2

_____ is used to make purchases while ______ is the total collection of pieces of property that serve to store value.

Money; wealth

What best describes the two measures of the money supply?

The two measures do not move together, so they cannot be used interchangeably by policymakers

__________ are the time and resources spent trying to exchange goods and services.

Transaction costs

T/F: Income is a flow variable.

True

In a barter economy the number of prices in an economy with N goods is

[N(N-1)]/2

Of the following assets, the least liquid is a. stocks b. traveler's checks c. checking deposits d. a house

a house

A hyperinflation is

a period of extreme inflation generally greater than 50% per month

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

accepted as payment for debts

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

are easily stolen

What sequence accurately describes the evolution of the payments system?

barter, coins made of precious metals, paper currency, checks, electronic funds transfers

Whatever a society uses as money, the distinguishing characteristic is that it must

be generally accepted as payment for goods and services or in the repayment of debt

A smart card is the equivalent of

cash

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 their cash

A disadvantage of __________ is that it is very heavy and hard to transport from one place to another.

commodity money

As the payments system evolves from barter to a monetary system,

commodity money is likely to precede the use of paper currency

Which of the following is not a form of e-money? a. debit card b. credit card c. stored-value card d. smart card

credit card

Which of the following is included in both M1 and M2? a. Currency b. Savings deposits c. Small-denomination time deposits d. Money market deposit accounts

currency

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

currency plus traveler's checks

Ranking an asset from most liquid to least liquid, the correct order is

currency; savings bonds; house

An examination of revised money supply statistics, when compared to the initial statistics, suggests that the initial statistics

do not provide a good guide to short-run movements in the money supply

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

During the past two decades an important characteristic of the modern payments system has been the rapidly increasing use of

electronic fund transfers

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

If the price level doubles, the value of money

falls by 50 percent

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

flat

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

hyperinflation

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

An individual's annual salary is his/her

income

The conversion of a barter economy to one that uses money

increases efficiency by reducing transaction costs

A fall in the level of prices

increases the value of money

The evolution of the payments system from barter to precious metals, then to flat money, then to checks can best be understood as a consequence of

innovations that reduced the costs of exchanging goods and services

As a store of value, money

is a way of saving for future purchases

Generally, the initial money supply data reported by the Fed

is not a reliable guide to the short-run behavior of the money supply

All of the following are necessary criteria for a commodity to functions as money except a. it must deteriorate quickly b. it must be divisible c. it must be easy to carry d. it must be widely accepted

it must deteriorate quickly

Increasing transactions costs of selling an asset make the asset

less liquid

Monetary aggregates are

measures of the money supply reported by the Federal Reserve

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

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

money

Which of the following statements best explains how the use of money in an economy increases economic efficiency? a. Money is costless to produce b. Money discourages specialization c. Money decreases transaction costs d. Money cannot have an effect on economic efficiency

money increases economic efficiency because it decreases transaction costs

The difference between money and income is that

money is a stock and income is a flow

Which of the following is included in M2 but not in M1? a. NOW accounts b. Demand deposits c. Currency d. Money market mutual fund shares (retail)

money market mutual fund shares (retail)

During hyperinflations,

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

The initial money supply data reported by the Fed are not a reliable guide to short-run movements in the money supply such as a _____, but are reasonably reliable for longer periods such as a ____.

month; year

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

Defining money becomes ____ difficult as the pace of financial innovation ________.

more; quickens

In explaining the evolution of money

new forms of money evolve to lower transaction costs

Currency includes

paper money and coins

The evolution of the payments system from barter to precious metals, then to flat money, then to checks can best be understood as a consequence of the fact that

precious metals were difficult to carry and transport

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

Which of the following is not included in the measure of M1? a. NOW accounts b. Demand deposits c. Currency d. Savings deposits

savings deposits

Which of the following is not included in the monetary aggregate M2? a. Currency b. Savings deposits c. Traveler's checks d. Checking deposits

savings deposits

The Fed revises its estimates of the monetary aggregates, sometimes by large amounts, because

seasonal adjustments become more precise only as more data becomes available

The increase in holiday spending is not the same every year causing the Fed's adjustment for __________ to be revised as more data becomes available.

seasonal variation

The Fed estimates initial monetary aggregate reports because _____ depository institutions report the amount of their deposits infrequently.

small

Which of the following is not included in the M1 measure of money but is included in the M2 measure of money? a. Currency b. Traveler's checks c. Demand deposits d. Small-denomination time deposits

small-denomination time deposits

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

Even economists have no single, precise definition of money because

the "moneyless" or liquidity of an asset is a matter of degree

The decade during which the growth rates of monetary aggregates diverged the most is

the 1990's

The currency component includes paper money and coins held in __________.

the hands of the nonbank public

The payments system is

the method of conducting transactions in the economy

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

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

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

the requirement of a double coincidence of wants/needs

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

Introduction of checks into the payments system reduced the costs of exchanging goods and services. Another advantage of checks is that

they provide convenient receipts for purchases

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

transaction costs are higher

An electronic payments system has not completely replaced the paper payments system because of all of the following reasons except a. expensive equipment is necessary to set up the system b. security concerns c. privacy concerns d. transportations costs

transportation costs

The M1 measure of money includes

traveler's checks

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

A person's house is part of his/her

wealth

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

wealth


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