You are on page 1of 25

Money, Banking, and the Financial System (Hubbard/O'Brien) Chapter 2 Money and the Payments System 2.

1 Do We Need Money? 1) An important reason why economies at an early stage of development tend to operate inefficiently is A) they tend to be dominated by the agric lt ral sector! where prod ctivity is s ally low. ") they tend to have a thoritarian governments that stifle innovation. #) they tend to be plag ed by s perstitio s beliefs that stifle innovation. D) the high transactions costs associated with barter. Answer$ D Diff$ 2 %age &ef$ 2' (opic$ barter )b*ective$ Analy+e the inefficiencies of a barter system AA#,"$ &eflective (hin-ing 2) "y .speciali+ation. economists mean a sit ation where A) individ als prod ce the goods or services for which they have relatively the best ability. ") goods are traded directly for goods and money is not sed. #) individ als who prod ce goods do not also prod ce services and individ als who prod ce services do not also prod ce goods. D) individ als are assigned to occ pations on the basis of tests that ga ge their relative abilities. Answer$ A Diff$ 1 %age &ef$ 2/ (opic$ speciali+ation )b*ective$ Analy+e the inefficiencies of a barter system AA#,"$ &eflective (hin-ing 0) (he most important economic benefit from speciali+ation is that it A) ma-es it possible for an economy to begin sing money. ") leads to an increase in the standard of living in an economy. #) ma-es barter possible. D) eliminates the need for financial mar-ets. Answer$ " Diff$ 2 %age &ef$ 2/ (opic$ speciali+ation )b*ective$ Analy+e the inefficiencies of a barter system AA#,"$ &eflective (hin-ing

1 #opyright 1 2212 %earson 3d cation! 4nc.

5) When an economy relies on speciali+ation! A) the economy will generally prod ce only one prod ct. ") the economy will s ally be heavily agric lt ral. #) each individ al in the economy prod ces the goods or services for which he or she has relatively the best ability. D) each individ al will be assigned by the government to prod ce that good or service the government believes the economy sho ld speciali+e in. Answer$ # Diff$ 2 %age &ef$ 2/ (opic$ speciali+ation )b*ective$ Analy+e the inefficiencies of a barter system AA#,"$ &eflective (hin-ing 6) 7 ndamentally! to reap the benefits of speciali+ation! an economy m st A) be heavily ind strial. ") be heavily agric lt ral. #) have an e8tensive system of higher ed cation. D) develop ways for individ als to trade goods with one another. Answer$ D Diff$ 2 %age &ef$ 2/ (opic$ speciali+ation )b*ective$ Analy+e the inefficiencies of a barter system AA#,"$ &eflective (hin-ing ') "arter is A) another name for money. ") an e8change of goods and services directly for goods and services. #) the basis for economic speciali+ation. D) the main system of e8change in the 9nited ,tates today. Answer$ " Diff$ 1 %age &ef$ 2' (opic$ barter )b*ective$ Analy+e the inefficiencies of a barter system AA#,"$ &eflective (hin-ing :) 9nder a system of barter A) each individ al trades o tp t directly with another. ") only agric lt ral goods may be traded. #) goods may be traded for money! b t money may not be traded for goods. D) c rrency is accepted for p rchases! b t personal chec-s are not. Answer$ A Diff$ 1 %age &ef$ 2' (opic$ barter )b*ective$ Analy+e the inefficiencies of a barter system AA#,"$ &eflective (hin-ing

2 #opyright 1 2212 %earson 3d cation! 4nc.

/) Which of the following is an e8ample of a barter transaction? A) An individ al pays her electric bill with a chec-. ") An individ al pays her electric bill with c rrency. #) An individ al provides three light b lbs to her neighbor in e8change for two gallons of mil-. D) An individ al deposits three twenty;dollar bills in her chec-ing acco nt. Answer$ # Diff$ 1 %age &ef$ 2' (opic$ barter )b*ective$ Analy+e the inefficiencies of a barter system AA#,"$ &eflective (hin-ing <) 4n a barter system individ als A) find it impossible to speciali+e. ") m st be entirely self;s fficient. #) find it diffic lt to speciali+e! b t may be able to do so. D) will almost invariably speciali+e. Answer$ # Diff$ 2 %age &ef$ 2' (opic$ barter )b*ective$ Analy+e the inefficiencies of a barter system AA#,"$ &eflective (hin-ing 12) A system of barter has s bstantial transactions costs beca se A) ta8es nder s ch a system are generally a large fraction of the val e of o tp t. ") traders m st spend considerable time searching for trading partners. #) the ncertainties of trade res lt in high legal fees being inc rred to draw p binding contracts. D) the ncertainties of trade res lt in high ins rance premi ms. Answer$ " Diff$ 2 %age &ef$ 2' (opic$ barter )b*ective$ Analy+e the inefficiencies of a barter system AA#,"$ &eflective (hin-ing 11) 9nder a barter system A) each good has many prices. ") each good has a single price. #) no prices for goods e8ist. D) prices for goods are very stable. Answer$ A Diff$ 1 %age &ef$ 2' (opic$ barter )b*ective$ Analy+e the inefficiencies of a barter system AA#,"$ &eflective (hin-ing

0 #opyright 1 2212 %earson 3d cation! 4nc.

12) =ow many prices wo ld there be in a barter economy with 122 goods? A) 122 ") 1!222 #) 5!<62 D) 12!222 Answer$ # Diff$ 1 %age &ef$ 2: (opic$ barter )b*ective$ Analy+e the inefficiencies of a barter system AA#,"$ &eflective (hin-ing 10) (he problem of a do ble coincidence of wants refers to A) the insatiability of wants in a free mar-et economy. ") poorly;managed companies prod cing what cons mers want only by coincidence. #) the necessity in a barter system of each trading partner wanting what the other has to trade. D) the li-elihood that needs will not be the same as wants. Answer$ # Diff$ 1 %age &ef$ 2' (opic$ barter )b*ective$ Analy+e the inefficiencies of a barter system AA#,"$ &eflective (hin-ing 15) Andy can>t ma-e a deal with Danny. Andy has a Ale8 &odrig e+ baseball card and wo ld li-e to trade it to Danny for Danny>s Albert % *ols card! b t Danny doesn>t want a Ale8 &odri? e+ card. Andy>s problem ill strates the drawbac- to a barter system -nown as A) the speciali+ation problem. ") the do ble coincidence of wants problem. #) the many prices problem. D) the transactions problem. Answer$ " Diff$ 2 %age &ef$ 2' (opic$ barter )b*ective$ Analy+e the inefficiencies of a barter system AA#,"$ &eflective (hin-ing 16) Which of the following is N)( a significant cost that a barter system imposes on an economy? A) Many prices m st be maintained for each good. ") )nly agric lt ral goods may be traded. #) ,peciali+ation of labor is hindered. D) (he costs arising from the problem of finding two people who each want what the other prod ces. Answer$ " Diff$ 1 %age &ef$ 2' (opic$ barter )b*ective$ Analy+e the inefficiencies of a barter system AA#,"$ &eflective (hin-ing
5 #opyright 1 2212 %earson 3d cation! 4nc.

1') Which of the following is the most efficient means of trade? A) barter ") money #) government rationing D) the combination of barter with some government rationing Answer$ " Diff$ 1 %age &ef$ 2/ (opic$ barter )b*ective$ Analy+e the inefficiencies of a barter system AA#,"$ &eflective (hin-ing 1:) 4n Moscow in 1</<! what were ta8i drivers sing as a medi m of e8change? A) & ssian r bles ") Marlboro cigarettes #) gold coins D) caviar Answer$ " Diff$ 1 %age &ef$ 2: (opic$ barter ,pecial 7eat re$ Ma-ing the #onnection )b*ective$ Analy+e the inefficiencies of a barter system AA#,"$ &eflective (hin-ing 1/) Money eliminates the need for A) any government role in the economy. ") speciali+ation. #) people to have a do ble coincidence of wants. D) the mar-et system. Answer$ # Diff$ 1 %age &ef$ 2/ (opic$ barter )b*ective$ Analy+e the inefficiencies of a barter system AA#,"$ &eflective (hin-ing 1<) 9sing a good as a medi m of e8change confers the benefit that A) the need to ? ote so many prices in trade is red ced. ") the need for a do ble coincidence of wants is greatly increased. #) the need for speciali+ation is red ced. D) transactions costs are increased! b t they now may be paid in money terms. Answer$ A Diff$ 2 %age &ef$ 2: (opic$ barter )b*ective$ Analy+e the inefficiencies of a barter system AA#,"$ &eflective (hin-ing

6 #opyright 1 2212 %earson 3d cation! 4nc.

22) =ow does the e8istence of money affect economic growth? Answer$ 4t red ces transactions costs and other efficiencies of barter. %eople can speciali+e! becoming far more prod ctive than if they tried to prod ce all goods and services they cons mer themselves. Diff$ 2 %age &ef$ 2/ (opic$ barter )b*ective$ Analy+e the inefficiencies of a barter system AA#,"$ Analytic ,-ills 21) What are fo r inefficiencies of a barter system? Answer$ 9nder a barter system! there are several inefficiencies. 7irst! there m st be a do ble coincidence of wants! res lting in high transaction costs. ,econd! there will be many prices for each good@ one for each good for which it can be traded. (hird! there is a lac- of standardi+ation in terms of the goods to be e8changed. 7o rth! it will be diffic lt to acc m late wealth. Diff$ 2 %age &ef$ 2';2: (opic$ barter )b*ective$ Analy+e the inefficiencies of a barter system AA#,"$ Analytic ,-ills 2.2 (he Aey 7 nctions of Money 1) Money is a medi m of e8change in that A) money is generally accepted for b ying and selling goods and services. ") c rrency may be e8changed for gold at any national ban-. #) other assets may be better or worse in facilitating e8change than money. D) it m st maintain most of its val e over time. Answer$ A Diff$ 1 %age &ef$ 2/ (opic$ f nctions of money )b*ective$ Disc ss the fo r -ey f nctions of money AA#,"$ &eflective (hin-ing 2) Money as a medi m of e8change refers only to A) c rrency. ") gold coins. #) anything that is generally accepted as payment for goods and services. D) chec-s at commercial ban-s. Answer$ # Diff$ 1 %age &ef$ 2/ (opic$ f nctions of money )b*ective$ Disc ss the fo r -ey f nctions of money AA#,"$ &eflective (hin-ing

' #opyright 1 2212 %earson 3d cation! 4nc.

0) When economists refer to the role of money as a nit of acco nt! they mean that A) most acco nting systems reflect that goods are p rchased with c rrency. ") most acco nting systems reflect that goods are p rchased with chec-s. #) money gives traders a way of meas ring val e in the economy. D) money ma-es it possible for speciali+ation to ta-e place. Answer$ # Diff$ 1 %age &ef$ 2/ (opic$ f nctions of money )b*ective$ Disc ss the fo r -ey f nctions of money AA#,"$ &eflective (hin-ing 5) When economists refer to the role of money as a store of val e! they mean that A) money never loses its val e! nli-e other assets. ") money allows val e to be stored easily. #) the val e of money falls only when the ? antity of money in circ lation falls. D) the val e of money falls only when the ? antity of money in circ lation rises. Answer$ " Diff$ 1 %age &ef$ 2< (opic$ f nctions of money )b*ective$ Disc ss the fo r -ey f nctions of money AA#,"$ &eflective (hin-ing 6) An asset is A) the same thing as a liability. ") a thing of val e that can be owned. #) money! as opposed to stoc- or bonds. D) anything that never declines in val e. Answer$ " Diff$ 1 %age &ef$ 2< (opic$ f nctions of money )b*ective$ Disc ss the fo r -ey f nctions of money AA#,"$ &eflective (hin-ing ') (he attrib te that disting ishes money from other assets is that only money A) retains its val e d ring times of inflation. ") is co nted in determining the si+e of an individ al>s wealth. #) serves as a medi m of e8change. D) may be sed as collateral for a ban- loan. Answer$ # Diff$ 1 %age &ef$ 2/ (opic$ f nctions of money )b*ective$ Disc ss the fo r -ey f nctions of money AA#,"$ &eflective (hin-ing

: #opyright 1 2212 %earson 3d cation! 4nc.

:) Wealth is A) the s m of the val e of assets. ") e? al to income. #) a flow variable. D) the s m of the val e of assets min s val e of liabilities. Answer$ D Diff$ 2 %age &ef$ 2< (opic$ f nctions of money )b*ective$ Disc ss the fo r -ey f nctions of money AA#,"$ &eflective (hin-ing /) (he difference between money and income is that whereas income is an individ al>s A) flow of earnings over a period of time! money is an individ al>s stoc- of c rrency and c rrency s bstit tes. ") stoc- of all assets! money is an individ al>s stoc- of c rrency and c rrency s bstit tes. #) flow of earnings over a period of time! money is an individ al>s stoc- of all assets. D) stoc- of c rrency and c rrency s bstit tes! money is an individ al>s stoc- of all assets. Answer$ A Diff$ 2 %age &ef$ 2< (opic$ f nctions of money )b*ective$ Disc ss the fo r -ey f nctions of money AA#,"$ &eflective (hin-ing <) 4n comparing money to shares of Apple stoc-! we can say that A) money is a store of val e! b t shares of Apple stoc- are not. ") shares of Apple stoc- are a store of val e! b t money is not. #) both money and shares of Apple stoc- are stores of val e. D) neither money nor shares of Apple stoc- are stores of val e. Answer$ # Diff$ 2 %age &ef$ 2< (opic$ f nctions of money )b*ective$ Disc ss the fo r -ey f nctions of money AA#,"$ &eflective (hin-ing 12) Why do individ als hold money when it does not provide the services that! say! a ho se does? A) Money is the most li? id asset. ") Money is the only form in which wealth may be held. #) Money increases in val e faster than other assets. D) Money is sef l in avoiding ta8es on certain transactions. Answer$ A Diff$ 2 %age &ef$ 2< (opic$ f nctions of money )b*ective$ Disc ss the fo r -ey f nctions of money AA#,"$ &eflective (hin-ing

/ #opyright 1 2212 %earson 3d cation! 4nc.

11) )ther assets are inferior to money in the sense that A) they increase in val e more slowly than does money. ") they have a lower overall ret rn than money. #) they are more v lnerable to losing their real val e as inflation increases. D) they generate transactions costs when they are e8changed for money. Answer$ D Diff$ 2 %age &ef$ 2< (opic$ f nctions of money )b*ective$ Disc ss the fo r -ey f nctions of money AA#,"$ &eflective (hin-ing 12) When economists refer to the role of money as a standard of deferred payment! they mean that A) payments by chec-s are s ally deferred ntil the chec-s clear the ban-. ") money earns interest while loan payments are deferred. #) money provides a standard for payments that will occ r in the f t re. D) money today is worth less than money tomorrow. Answer$ # Diff$ 1 %age &ef$ 2< (opic$ f nctions of money )b*ective$ Disc ss the fo r -ey f nctions of money AA#,"$ &eflective (hin-ing 10) 4f prices increase rapidly A) money>s sef lness as a store of val e is diminished. ") money increases in val e. #) deflation is li-ely. D) prices will decline to their normal level. Answer$ A Diff$ 2 %age &ef$ 2< (opic$ f nctions of money )b*ective$ Disc ss the fo r -ey f nctions of money AA#,"$ &eflective (hin-ing 15) , ppose B122 b ys less in the year 2211 than in 2222. (hen we can say that A) money>s store of val e has decreased. ") money>s store of val e has increased. #) the economy m st have been growing rapidly between 2222 and 2211. D) the economy m st have been growing slowly between 2222 and 2211. Answer$ A Diff$ 2 %age &ef$ 2< (opic$ f nctions of money )b*ective$ Disc ss the fo r -ey f nctions of money AA#,"$ &eflective (hin-ing

< #opyright 1 2212 %earson 3d cation! 4nc.

16) Which of the following is N)( an important criterion for whether a good will be sable as a medi m of e8change? A) (he good m st be of standardi+ed ? ality. ") (he good m st be val able relative to its weight. #) (he good m st have val e even if it were not being sed as money. D) (he good m st be d rable so that val e is not lost thro gh prod ct spoilage. Answer$ # Diff$ 2 %age &ef$ 2<;02 (opic$ f nctions of money )b*ective$ Disc ss the fo r -ey f nctions of money AA#,"$ &eflective (hin-ing 1') Which criterion for s itability as a medi m of e8change do 7ederal &eserve Notes meet? A) (hey are of standardi+ed ? ality. ") (hey are d rable. #) (hey are acceptable to most traders. D) 7ederal &eserve Notes meet all of the criteria for s itability as a medi m of e8change. Answer$ D Diff$ 1 %age &ef$ 02 (opic$ f nctions of money )b*ective$ Disc ss the fo r -ey f nctions of money AA#,"$ &eflective (hin-ing 1:) What determines the acceptability of dollar bills as a medi m of e8change? A) ) r society>s willingness to se green paper notes iss ed by the 7ederal &eserve as money. ") (he willingness of the 7ederal &eserve to redeem dollar bills for gold. #) (he willingness of the 9.,. (reas ry to redeem dollar bills for gold. D) (he p blic>s fear that failing to accept dollar bills will trigger a hyperinflation. Answer$ A Diff$ 2 %age &ef$ 02 (opic$ f nctions of money )b*ective$ Disc ss the fo r -ey f nctions of money AA#,"$ &eflective (hin-ing 1/) 4n what sense do self;f lfilling e8pectations determine the acceptability of a medi m of e8change? A) %eople li-e to do what the government e8pects them to do. ") %eople val e something as money only if they believe others will accept it from them as payment. #) %eople e8pect that money will never lose its val e. D) %eople e8pect that event ally every co ntry will se the same medi m of e8change. Answer$ " Diff$ 2 %age &ef$ 02 (opic$ f nctions of money )b*ective$ Disc ss the fo r -ey f nctions of money AA#,"$ &eflective (hin-ing
12 #opyright 1 2212 %earson 3d cation! 4nc.

1<) 7iat money A) is money that wo ld have no val e if it were not sable as money. ") is illegal in most advanced! ind strial co ntries. #) is s ally some type of precio s metal. D) will generally be accepted in trade for less than its face val e. Answer$ A Diff$ 1 %age &ef$ 02 (opic$ fiat money )b*ective$ Disc ss the fo r -ey f nctions of money AA#,"$ &eflective (hin-ing 22) 4f money is declared to be legal tender! it m st be A) minted from a precio s metal. ") acceptable to citi+ens of foreign co ntries. #) possible to e8change it for an e? ivalent amo nt of precio s metal. D) accepted to settle private transactions and it m st be sed in paying ta8es. Answer$ D Diff$ 1 %age &ef$ 02 (opic$ fiat money )b*ective$ Disc ss the fo r -ey f nctions of money AA#,"$ &eflective (hin-ing 21) "y designating 7ederal &eserve c rrency as legal tender! the federal government A) has ens red that 7ederal &eserve c rrency will serve as money. ") has g aranteed that 7ederal &eserve c rrency may be e8changed for an e? ivalent amo nt of gold or silver. #) has mandated that 7ederal &eserve c rrency be accepted for payment of debts. D) has mandated that 7ederal &eserve c rrency be accepted by citi+ens of foreign co ntries in e8change for their co ntries> c rrencies. Answer$ # Diff$ 1 %age &ef$ 02 (opic$ fiat money )b*ective$ Disc ss the fo r -ey f nctions of money AA#,"$ &eflective (hin-ing 22) What is the most important factor for 7ederal &eserve c rrency to be accepted as money? A) 4ts acceptance by b sinesses and ho seholds in the 9nited ,tates in e8change for goods and services. ") 4ts designation as legal tender by the federal government. #) (he willingness of the federal government to accept it in e8change for an e? ivalent amo nt of gold or silver coins. D) (he willingness of foreign b sinesses and ban-s to accept it in e8change for goods and services. Answer$ A Diff$ 2 %age &ef$ 02 (opic$ fiat money )b*ective$ Disc ss the fo r -ey f nctions of money AA#,"$ &eflective (hin-ing
11 #opyright 1 2212 %earson 3d cation! 4nc.

20) 4f fiat money has no val e apart from its se as money! how can it be sed as a medi m of e8change? Answer$ (he most important reason paper c rrency circ lates as a medi m of e8change is the confidence of cons mers and firms that if they accept paper c rrency they will be able to pass it along when they need to b y goods and services. Also! the federal government has designated it to be legal tender! meaning the government accepts it in payment of ta8es and re? ires it to be accepted in payment of debts. Diff$ 2 %age &ef$ 02 (opic$ f nctions of money )b*ective$ Disc ss the fo r -ey f nctions of money AA#,"$ &eflective (hin-ing 25) 3conomic st dies have shown that co ntries that have high inflation rates have lower rates of economic growth than do co ntries with low inflation rates. 38plain what nderlies this relationship between inflation and economic growth. Answer$ 4n terms of the iss es disc ssed in this chapter! inflation red ces the sef lness of c rrency as a store of val e and as a standard of deferred payment. 4n e8treme cases! high rates of inflation have led to a shift to a barter system or to the se of foreign c rrency as a medi m of e8change. (hese effects wo ld tend to red ce the efficiency of the economy and the rate of economic growth. Diff$ 0 %age &ef$ 2/! 2< (opic$ f nctions of money )b*ective$ Disc ss the fo r -ey f nctions of money AA#,"$ Analytic ,-ills 26) 4n what way are other assets less li? id than money? Answer$ Co inc r transactions costs when yo e8change other assets for money. Diff$ 2 %age &ef$ 2< (opic$ f nctions of money )b*ective$ Disc ss the fo r -ey f nctions of money AA#,"$ &eflective (hin-ing 2') What is the difference between money! income! and wealth? Answer$ 4ncome is e? al to a person>s earnings over a period of time. Wealth is the s m of a person>s assets min s the s m of a person>s liabilities. Money is a medi m of e8change and one component of a person>s wealth. Diff$ 2 %age &ef$ 2< (opic$ f nctions of money )b*ective$ Disc ss the fo r -ey f nctions of money AA#,"$ &eflective (hin-ing

12 #opyright 1 2212 %earson 3d cation! 4nc.

2:) What are the five characteristics that ma-e an asset s itable to be sed as a medi m of e8change? Answer$ 4t m st be acceptable to most people@ standardi+ed in terms of ? ality@ d rable so that it doesn>t become too worn o t to be sable@ val able relative to its weight@ divisible since prices of goods and services vary. Diff$ 2 %age &ef$ 2<;02 (opic$ f nctions of money )b*ective$ Disc ss the fo r -ey f nctions of money AA#,"$ &eflective (hin-ing 2.0 (he %ayments ,ystem 1) (he payments system is A) the mechanism for cond cting economic transactions. ") another name for the system of foreign e8change rates. #) the phrase sed to describe how transactions are carried o t in an economy that does not se money. D) the way in which economic transactions are carried o t in a government;controlled economy! s ch as the former ,oviet 9nion. Answer$ A Diff$ 1 %age &ef$ 01 (opic$ payments system )b*ective$ 38plain the role of the payments system AA#,"$ &eflective (hin-ing 2) Which of the following is an e8ample of a commodity money? A) gold coins ") dollar bills #) "ritish po nd notes D) Dapanese yen notes Answer$ A Diff$ 1 %age &ef$ 01 (opic$ payments system )b*ective$ 38plain the role of the payments system AA#,"$ &eflective (hin-ing 0) All of the following are problems associated with commodity money 3E#3%( A) it is a c mbersome form of payments system. ") commodities tend to have little val e in and of themselves. #) its val e is dependent on its p rity. D) costs are inc rred in certifying the p rity and weight of commodity money. Answer$ " Diff$ 2 %age &ef$ 01 (opic$ payments system )b*ective$ 38plain the role of the payments system AA#,"$ &eflective (hin-ing
10 #opyright 1 2212 %earson 3d cation! 4nc.

5) Which of the following is an e8ample of fiat money? A) A cowry shell sed as money on a ,o th %acific island. ") A gold coin sed as money in nineteenth cent ry 3ngland. #) A 7ederal &eserve Note sed as money in the twenty;first cent ry 9nited ,tates. D) A po nd of salt sed as money in medieval 7rance. Answer$ # Diff$ 1 %age &ef$ 01 (opic$ payments system )b*ective$ 38plain the role of the payments system AA#,"$ &eflective (hin-ing 6) #hec-s are A) not acceptable for settling transactions in most ind striali+ed co ntries. ") less important than c rrency as a means of settling transactions. #) promises to pay on demand money deposited with a financial instit tion. D) promises to pay coins minted from precio s metals on demand. Answer$ # Diff$ 1 %age &ef$ 02 (opic$ payments system )b*ective$ 38plain the role of the payments system AA#,"$ &eflective (hin-ing ') )ne advantage of sing chec-s to settle transactions is A) they are more diffic lt to se fra d lently than c rrency or precio s metals are. ") there is effectively no cost to sing them. #) they are as li? id as cash. D) there is no information cost involved in accepting them. Answer$ A Diff$ 2 %age &ef$ 02 (opic$ payments system )b*ective$ 38plain the role of the payments system AA#,"$ &eflective (hin-ing :) (he se of chec-s in transactions A) entails lower information costs than the se of c rrency. ") entails fewer steps than settling transactions with c rrency. #) avoids the cost of shipping c rrency bac- and forth. D) entails lower information and fewer steps than settling transactions with c rrency. Answer$ # Diff$ 2 %age &ef$ 02 (opic$ payments system )b*ective$ 38plain the role of the payments system AA#,"$ &eflective (hin-ing

15 #opyright 1 2212 %earson 3d cation! 4nc.

/) A tomatic teller machines and debit cards are e8amples of A) electronic f nds transfer systems. ") commodity monies. #) legal tender in the 9nited ,tates. D) modern barter systems. Answer$ A Diff$ 1 %age &ef$ 02 (opic$ payments system )b*ective$ 38plain the role of the payments system AA#,"$ &eflective (hin-ing <) All of the following are e8amples of electronic f nds 3E#3%( A) credit cards. ") debit cards. #) stored val e cards. D) e;cash. Answer$ A Diff$ 1 %age &ef$ 02 (opic$ payments system )b*ective$ 38plain the role of the payments system AA#,"$ &eflective (hin-ing 12) What do many economists blame for the severity of the Freat Depression? A) (he collapse of the ban-ing system. ") A rapid increase in the money s pply. #) (he iss ing of an e8cessively large amo nt of c rrency by the 7ederal &eserve. D) (he collapse of the electronic f nds transfer system. Answer$ A Diff$ 1 %age &ef$ 00 (opic$ payments system )b*ective$ 38plain the role of the payments system AA#,"$ &eflective (hin-ing 11) Why does the payments system contin e to change over time? Answer$ New forms of payments are introd ced that increase the efficiency of the payments system by red cing transactions costs. Diff$ 2 %age &ef$ 00 (opic$ payments system )b*ective$ 38plain the role of the payments system AA#,"$ Analytic ,-ills

16 #opyright 1 2212 %earson 3d cation! 4nc.

2.5 Meas ring the Money , pply 1) As of D ly 2212! the amo nt of money as meas red by M2 was abo t A) B//2 billion. ") B1:22 billion. #) B/'22 billion. D) B15 trillion. Answer$ # Diff$ 1 %age &ef$ 05 (opic$ monetary aggregates )b*ective$ 38plain how the 9.,. money s pply is meas red AA#,"$ &eflective (hin-ing 2) (he M2 aggregate A) incl des M1 pl s short;term investment acco nts. ") incl des M1 pl s large;denomination time deposits. #) e? als c rrency pl s chec-ing acco nt deposits at commercial ban-s. D) is the best definition of money p rely as a medi m of e8change. Answer$ A Diff$ 1 %age &ef$ 05 (opic$ monetary aggregates )b*ective$ 38plain how the 9.,. money s pply is meas red AA#,"$ &eflective (hin-ing 0) Which of the following is N)( incl ded in M2? A) c rrency ") savings bonds #) money mar-et deposit acco nts D) overnight rep rchase agreements Answer$ " Diff$ 1 %age &ef$ 05 (opic$ monetary aggregates )b*ective$ 38plain how the 9.,. money s pply is meas red AA#,"$ &eflective (hin-ing 5) Which of the following statements is tr e abo t M2? A) 4ts total val e is smaller than that of M1. ") Apart from those assets also incl ded in M1! it incl des no assets that offer chec-;writing feat res. #) 4ts total val e is abo t five times as large as M1. D) 4t incl des large;denomination time deposits. Answer$ # Diff$ 1 %age &ef$ 05 (opic$ monetary aggregates )b*ective$ 38plain how the 9.,. money s pply is meas red AA#,"$ &eflective (hin-ing
1' #opyright 1 2212 %earson 3d cation! 4nc.

6) Which of the following is incl ded in M1! b t not in M2? A) c rrency ") chec-ing acco nt deposits #) travelers chec-s D) 3verything in M1 is in M2. Answer$ D Diff$ 1 %age &ef$ 05 (opic$ monetary aggregates )b*ective$ 38plain how the 9.,. money s pply is meas red AA#,"$ &eflective (hin-ing ') Money mar-et deposit acco nts are incl ded in A) only M1. ") only M2. #) M1 and M2. D) neither M1 nor M2. Answer$ " Diff$ 1 %age &ef$ 05 (opic$ monetary aggregates )b*ective$ 38plain how the 9.,. money s pply is meas red AA#,"$ &eflective (hin-ing :) (he M1 and M2 aggregates A) have moved very closely together since 1<'2. ") have moved broadly together since 1<'2. #) have moved significantly differently d ring certain periods since 1<'2. D) have moved broadly together b t have also moved very differently d ring certain periods since 1<'2. Answer$ D Diff$ 2 %age &ef$ 0' (opic$ monetary aggregates )b*ective$ 38plain how the 9.,. money s pply is meas red AA#,"$ &eflective (hin-ing /) (he 7ed>s c rrent position towards the e8isting monetary aggregates is A) it is convinced that M1 is the best meas re of the money s pply. ") it is convinced that M2 is the best meas re of the money s pply. #) it is an iss e of ongoing research. D) it is reverting to considering c rrency alone as the best meas re of the money s pply. Answer$ # Diff$ 2 %age &ef$ 0: (opic$ monetary aggregates )b*ective$ 38plain how the 9.,. money s pply is meas red AA#,"$ &eflective (hin-ing

1: #opyright 1 2212 %earson 3d cation! 4nc.

<) 4n D ly 2212! what was the total val e of 9, c rrency in circ lation? A) B622 million ") B162 billion #) B//' billion D) B' trillion Answer$ # Diff$ 1 %age &ef$ 05 (opic$ monetary aggregates )b*ective$ 38plain how the 9.,. money s pply is meas red AA#,"$ &eflective (hin-ing 12) A monetary aggregate is a meas re of A) the inflation rate. ") the total economic activity of the co ntry. #) money broader than c rrency. D) definitive money. Answer$ # Diff$ 1 %age &ef$ 00 (opic$ monetary aggregates )b*ective$ 38plain how the 9.,. money s pply is meas red AA#,"$ &eflective (hin-ing 11) (he narrowest money meas re is A) c rrency pl s non;interest bearing chec-ing acco nts. ") c rrency pl s all chec-ing acco nts. #) c rrency pl s all deposits at financial instit tions. D) definitive money. Answer$ " Diff$ 2 %age &ef$ 05 (opic$ monetary aggregates )b*ective$ 38plain how the 9.,. money s pply is meas red AA#,"$ &eflective (hin-ing 12) Which of the following is the largest meas re of money in the 9nited ,tates? A) 7ederal &eserve notes ") definitive money #) M1 D) M2 Answer$ D Diff$ 1 %age &ef$ 05 (opic$ monetary aggregates )b*ective$ 38plain how the 9.,. money s pply is meas red AA#,"$ &eflective (hin-ing

1/ #opyright 1 2212 %earson 3d cation! 4nc.

10) Which of the following is N)( incl ded in M1? A) c rrency ") savings acco nt deposits #) chec-ing acco nt deposits D) traveler>s chec-s Answer$ " Diff$ 1 %age &ef$ 05 (opic$ monetary aggregates )b*ective$ 38plain how the 9.,. money s pply is meas red AA#,"$ &eflective (hin-ing 15) Appro8imately what proportion of 9, dollars are held o tside the 9nited ,tates? A) less than one;tenth ") one;fo rth #) one;half D) two;thirds Answer$ D Diff$ 1 %age &ef$ 06 (opic$ monetary aggregates )b*ective$ 38plain how the 9.,. money s pply is meas red AA#,"$ &eflective (hin-ing 16) What criteria sho ld be sed in deciding the best definition of the money s pply? Answer$ (he answer depends on the p rpose of the meas rement. 3conomists are primarily interested in the relation between monetary aggregates and other economic variables! s ch as o tp t! the price level! and interest rates. 4n this respect! a monetary aggregate is most sef l when it is most closely related to these economic variables. 9ntil the 1</2s! M1 was the most widely accepted meas re of the money s pply. 4n the 1</2s and 1<<2s! M2 has been most widely accepted. Diff$ 2 %age &ef$ 0' (opic$ monetary aggregates )b*ective$ 38plain how the 9.,. money s pply is meas red AA#,"$ Analytic ,-ills 1') Why wo ld people o tside the 9nited ,tates choose to hold 9.,. dollars? Answer$ At times! many co ntries e8perience high inflation and their ho seholds and firms switch to sing dollars instead of their domestic c rrency. ,ome co ntries se the dollar as legal tender. Also! d ring the financial crisis of 222:;222<! many foreigners chose to hold dollars as a safe haven. Diff$ 2 %age &ef$ 06 (opic$ monetary aggregates )b*ective$ 38plain how the 9.,. money s pply is meas red AA#,"$ Analytic ,-ills

1< #opyright 1 2212 %earson 3d cation! 4nc.

2.6 (he G antity (heory of Money$ A 7irst Hoo- At the Hin- "etween Money and %rices 1) , ppose the FD% implicit price deflator was 112.: in 2211 and 11'.2 in 2212. (herefore! the inflation rate in 2212 wo ld be A) 2./I. ") 2.<I. #) 0.0I. D) 1'I. Answer$ " Diff$ 2 %age &ef$ 0/ (opic$ e? ation of e8change and ? antity theory )b*ective$ 9se the ? antity theory of money to analy+e the relationship between money and prices in the long r n AA#,"$ Analytic ,-ills 2) A hyperinflation occ rs when A) inflation persists for more than two years. ") inflation persists for more than five years. #) the inflation rate e8ceeds 12I per year. D) the inflation rate e8ceeds 122I per year Answer$ D Diff$ 1 %age &ef$ 0< (opic$ e? ation of e8change and ? antity theory )b*ective$ 9se the ? antity theory of money to analy+e the relationship between money and prices in the long r n AA#,"$ &eflective (hin-ing 0) When prices rise! the p rchasing power of money A) rises. ") falls. #) is naffected. D) may rise! fall! or be naffected depending pon circ mstances. Answer$ " Diff$ 2 %age &ef$ 0: (opic$ e? ation of e8change and ? antity theory )b*ective$ 9se the ? antity theory of money to analy+e the relationship between money and prices in the long r n AA#,"$ &eflective (hin-ing

22 #opyright 1 2212 %earson 3d cation! 4nc.

5) (he p rchasing power of money A) rises when prices fall. ") rises when prices rise. #) is set by the 7ed in Dan ary of each year. D) is constant. Answer$ A Diff$ 2 %age &ef$ 0: (opic$ e? ation of e8change and ? antity theory )b*ective$ 9se the ? antity theory of money to analy+e the relationship between money and prices in the long r n AA#,"$ &eflective (hin-ing 6) (he velocity of money can best be described as A) how ? ic-ly prices are increasing. ") how ? ic-ly o tp t is increasing. #) the n mber of times each dollar in the money s pply s sed to b y goods and services incl ded in FD%. D) the growth rate of the money s pply. Answer$ # Diff$ 1 %age &ef$ 0: (opic$ e? ation of e8change and ? antity theory )b*ective$ 9se the ? antity theory of money to analy+e the relationship between money and prices in the long r n AA#,"$ &eflective (hin-ing ') According to the e? ation of e8change! the money s pply times the velocity of money e? als the A) price level. ") growth rate of the money s pply. #) real FD%. D) nominal FD%. Answer$ D Diff$ 2 %age &ef$ 0: (opic$ e? ation of e8change and ? antity theory )b*ective$ 9se the ? antity theory of money to analy+e the relationship between money and prices in the long r n AA#,"$ &eflective (hin-ing

21 #opyright 1 2212 %earson 3d cation! 4nc.

:) According to the ? antity theory of money! the growth rate of which of the following is +ero? A) money s pply ") velocity #) real FD% D) price level Answer$ " Diff$ 2 %age &ef$ 0/ (opic$ e? ation of e8change and ? antity theory )b*ective$ 9se the ? antity theory of money to analy+e the relationship between money and prices in the long r n AA#,"$ &eflective (hin-ing /) , ppose nominal FD% is B15 trillion and the money s pply is B2 trillion. What is the velocity of money? A) 2.150 ") : #) 12 D) 2/ Answer$ " Diff$ 2 %age &ef$ 0: (opic$ e? ation of e8change and ? antity theory )b*ective$ 9se the ? antity theory of money to analy+e the relationship between money and prices in the long r n AA#,"$ Analytic ,-ills <) According to the ? antity theory of money! if the long;r n economic growth rate is 2.6I! by how m ch sho ld the 7ed increase the money s pply if it wants inflation to be 2I? A) 2.6I ") 1.26I #) 5.6I D) 6I Answer$ # Diff$ 0 %age &ef$ 0/ (opic$ e? ation of e8change and ? antity theory )b*ective$ 9se the ? antity theory of money to analy+e the relationship between money and prices in the long r n AA#,"$ Analytic ,-ills

22 #opyright 1 2212 %earson 3d cation! 4nc.

12) According to the e? ation of e8change! how can national income grow even tho gh the amo nt of money does not? A) price level increases ") real FD% decrease #) velocity increases D) velocity decreases Answer$ # Diff$ 2 %age &ef$ 0: (opic$ e? ation of e8change and ? antity theory )b*ective$ 9se the ? antity theory of money to analy+e the relationship between money and prices in the long r n AA#,"$ &eflective (hin-ing 11) =yperinflations are s ally ca sed by large b dget deficits financed by A) selling bonds to private investors. ") selling bonds to the central ban-. #) raising ta8es. D) borrowing from commercial ban-s. Answer$ " Diff$ 0 %age &ef$ 51 (opic$ e? ation of e8change and ? antity theory )b*ective$ 9se the ? antity theory of money to analy+e the relationship between money and prices in the long r n AA#,"$ &eflective (hin-ing 12) Which co ntry e8periencing hyperinflation in e8cess of 16 billion percent in 222/? A) Argentina ") #anada #) 4celand D) Jimbabwe Answer$ D Diff$ 1 %age &ef$ 0< (opic$ e? ation of e8change and ? antity theory )b*ective$ 9se the ? antity theory of money to analy+e the relationship between money and prices in the long r n AA#,"$ &eflective (hin-ing 10) &esearch has shown that nations with highly independent central ban-s tend to have low A) inflation. ") interest rates. #) economic growth. D) nemployment. Answer$ A Diff$ 0 %age &ef$ 52 (opic$ e? ation of e8change and ? antity theory )b*ective$ 9se the ? antity theory of money to analy+e the relationship between money and prices in the long r n AA#,"$ &eflective (hin-ing
20 #opyright 1 2212 %earson 3d cation! 4nc.

15) All of the following were too- place d ring the Ferman hyperinflation in the 1<22s 3E#3%( A) ban-s red ced lending. ") some ban-s only made loans to c stomers who agreed to repay in terms of foreign c rrencies or commodities. #) De tsche "an- had to lay off many wor-ers d e to lac- of b siness. D) ho seholds and firms increased their demand for loans. Answer$ # Diff$ 2 %age &ef$ 51 (opic$ e? ation of e8change and ? antity theory ,pecial 7eat re$ Ma-ing the #onnection )b*ective$ 9se the ? antity theory of money to analy+e the relationship between money and prices in the long r n AA#,"$ &eflective (hin-ing 16) (he American #ivil War lasted from the spring of 1/'1 to the spring of 1/'6. D ring the war the #onfederate government iss ed s bstantial amo nts of fiat paper c rrency. What do yo thin- happened to the price level Kmeas red in #onfederate dollars) in the #onfederate states d ring the final months of the war? Answer$ D ring the final months of the war! the imminent demise of the #onfederate government greatly red ced the willingness of people to hold #onfederate c rrency. (he sef lness of #onfederate c rrency as a store of val e and as a standard of deferred payment declined sharply. (hose attempting to b y goods and services with the c rrency had to offer increasing amo nts of it in order to find anyone willing to accept it. )r! p t another way! the price level rose dramatically! meas red in #onfederate dollars. Diff$ 2 %age &ef$ 52 (opic$ e? ation of e8change and ? antity theory )b*ective$ 9se the ? antity theory of money to analy+e the relationship between money and prices in the long r n AA#,"$ Analytic ,-ills 1') Ma-e se of the ? antity theory of money to solve the following problem. 4f the 7ed has an inflation target of 2I and the velocity of money is constant! by how m ch sho ld it increase the money s pply each year if economic growth is e8pected to average 0I? Answer$ ,ince the percent change in the money s pply e? als the percent change in FD% pl s inflation! the money s pply sho ld grow by 2I L 0I M 6I. Diff$ 2 %age &ef$ 0/ (opic$ e? ation of e8change and ? antity theory )b*ective$ 9se the ? antity theory of money to analy+e the relationship between money and prices in the long r n AA#,"$ Analytic ,-ills

25 #opyright 1 2212 %earson 3d cation! 4nc.

1:) Ma-e se of the ? antity e? ation to answer the following problem. 4f the 7ed increases the money s pply by 5I! velocity increases by 1I! and economic growth is 0I! by how m ch will the price level increase? Answer$ ,ince the percent change in the money s pply pl s the percent change in velocity e? als the percent change in FD% pl s the percent change in the price level! the price level will increase by 2I K5I L 1I ; 0I). Diff$ 2 %age &ef$ 0/ (opic$ e? ation of e8change and ? antity theory )b*ective$ 9se the ? antity theory of money to analy+e the relationship between money and prices in the long r n AA#,"$ Analytic ,-ills 1/) What is normally the ltimate ca se of hyperinflation? Answer$ (he ltimate ca se of hyperinflation is s ally governments spending more than they collect in ta8es! which res lts in government b dget deficits. Fovernments that can>t sell bonds to private investors will often sell them to their central ban-s. 4n paying for the bonds! the central ban- increases the co ntry>s money s pply. 38cessive increases in the money s pply res lt in hyperinflation. Diff$ 2 %age &ef$ 51 (opic$ e? ation of e8change and ? antity theory )b*ective$ 9se the ? antity theory of money to analy+e the relationship between money and prices in the long r n AA#,"$ Analytic ,-ills 1<) What does research s ggest as to the relationship between the independence of the central ban- and inflation? What is the rationale for this relationship? Answer$ &esearch indicates that the more independent a central ban- is from the rest of the government! the lower the co ntry>s inflation rate will be. (he reason is that an independent central ban- is better able to resist political press res to increase the money s pply. Diff$ 2 %age &ef$ 52 (opic$ e? ation of e8change and ? antity theory )b*ective$ 9se the ? antity theory of money to analy+e the relationship between money and prices in the long r n AA#,"$ Analytic ,-ills

26 #opyright 1 2212 %earson 3d cation! 4nc.

You might also like