Ch 3 Questions

Question 1

Properly categorize each of the following​ concepts:

Money

Answer 1

stock variable

Question 2

A flow variable (income)

Answer 2

A flow variable is measured per unit of time.

Question 3

Income

Answer 3

Flow variable

Question 4

Savings deposits

Answer 4

Stock variable:

Question 5

Stock variables (Savings deposits, debt)

Answer 5

Stock variables are measured at a point in time. They are often referred to as snapshot variables.

Question 6

Wealth

Answer 6

Stock variable:

Question 7

Debt

Answer 7

Stock variable

Question 8

Money

Answer 8

Stock Variable

Question 9

Which of the following is measured as a flow per unit of​ time?

Answer 9

Income

Income is measured as a flow per unit of time. A flow per unit of time refers to a change in the amount per period of time.

Question 10

Wealth

Answer 10

Wealth represents all resources owned by an​ individual, including all assets.

Question 11

Most of the time it is quite difficult to separate the three functions of money. Money performs its three functions at all​ times, but sometimes we can stress one in particular. For each of the following​ situations, identify which function of money is emphasized.
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.

Answer 11

In this​ case, money is being used as a

medium of exchange

Question 12

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.

Answer 12

unit of account

Question 13

Maria is currently pregnant. She expects her expenditures to increase in the future and decides to increase the balance in her savings account.

Answer 13

In this​ case, money is being used as a

store of value

Question 14

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?

Answer 14

Inflation can often lead to currency substitutionlong dash—a situation in which citizens living in the inflationary environment substitute an​ external, more stable currency for their own. In this​ case, the external currency serves all three properties associated with money in that country.

Question 15

People in the United States in the nineteenth century were sometimes willing to be paid by cheque rather than with​ gold, even though they knew that there was a possibility that the cheque might bounce. Which of the following would represent an advantage of gold over cheques as a form of​ money?

Answer 15

Gold has intrinsic value when compared to cheques

Question 16

In ancient​ Greece, what property made gold a more likely candidate for use as money than​ wine?

Answer 16

Store value

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 transaction costs.​ Therefore, it is a better candidate for use as money.
Try Again

Question 17

It is not unusual to find a business that displays a sign saying​ “no personal​ checks, please.”

Answer 17

Based on this​ observation, a checking account must be
less liquid
than currency.

Question 18

When money is used as acceptance for payment of goods and​ services, it is being used as a

Answer 18

medium of exchange

Question 19

When money is used to express the relative value of goods and​ services, it is being used as a

Answer 19

unit of account

Question 20

When money is used to hold purchasing power for future​ use, it is being used as a

Answer 20

store of value

Question 21

Which of the following is not a purpose or function of​ money?

Answer 21

Money has three primary functions in any​ economy: as a medium of​ exchange, as a unit of​ account, and as a store of value.

Question 22

A payments system based on money is

Answer 22

A payments system based on money is more efficient than a barter economy because fewer prices are needed to establish relative values between all commodities.

Question 23

is the relative ease and speed with which an asset can be converted into cash.

Answer 23

Liquidity is the relative ease and speed with which an asset can be converted into cash.

Question 24

is the most liquid store of value in the economy.

Answer 24

Money is the most liquid store of value.

Question 25

We know that money is the most liquid store of value due to many reasons except that

Answer 25

We know that money is the most liquid store of value due to many reasons except that money is exposed to the risks associated with hyperinflation.

Question 26

An asset with great liquidity is one that

Answer 26

An asset with great liquidity is one that can be converted into a medium of exchange with relative ease and speed.

Question 27

Hyperinflation

Answer 27

are periods of extreme inflation.

Question 28

During​ hyperinflation, the quantity of money needed to purchase the most basic items are

Answer 28

excessive since money is

losing its value rapidly.

Question 29

Which of the following economies has the most efficient payments system?

Answer 29

An economy using checks

Question 30

Suppose that there are 16 goods in an economy. The number of prices that are needed to exchange any good for any other good are

Answer 30

To solve for the number of prices​ needed, we use the formula
           (n(n - 1)) /2
Number of prices needed = (16 (16 - 1)) / 2 = 120

Question 31

Which of the following represents an advantage of using commodity money for​ transactions?

Answer 31

An object that clearly has value to everyone is a likely candidate to serve as​ money, and a natural choice is a precious metal such as gold or silver. Money made up of precious metals or another valuable commodity is called commodity money. Since this form of money has intrinsic value beyond its use as a medium of​ exchange, it can be viewed as an advantage to using commodity money for transactions.
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Question 32

Which of the following is a disadvantage of using fiat money ​?

Answer 32

Public authorities may be tempted to produce too much of it

Question 33

Which of the following is a disadvantage of using checks as a means of​ payment?

Answer 33

All the paper shuffling required to process checks is costly.

Question 34

What is the main disadvantage of moving to e-money or moving to a cashless​ society?

Answer 34

There are problems with security and privacy

Question 35

Which of the following is an example of fiat​ money?

Answer 35

A five dollar bill is an example of fiat money. It is paper currency decreed by governments as legal tender​ (meaning that legally it must be accepted as payment for​ debts) but not convertible into coins or precious metal.

Question 36

Which of the following statements about fiat money is​ false?

Answer 36

It is false to say fiat money is redeemable into a particular precious metal such as gold. Fiat money is legal tender and is not backed by any coins or precious metal.

Question 37

Why is simply counting currency an inadequate measure of​ money?

Answer 37

There are other liquid assets similar to currency that can be used as money to purchase goods and services.

Question 38

Rank the following assets from most liquid ​(1​) to least liquid ​(6​)

Answer 38

1. CURRENCY
2. CHECKING
3. SAVINGS DEPOSITS
4. COMMON STOCK
5. CARS
6. HOUSES

Question 39

Which of the Federal​ Reserve’s measures of the monetary AGGREGATES —M1 or M2—is composed of the most liquid​ assets? Which is the larger​ measure?

Answer 39

All else​ equal, 
M1
 is the monetary aggregate composed of the most liquid assets and 
M2
 is the larger measure.

Question 40

For each of the following​ assets, indicate​ which, if​ any, of the monetary aggregates includes​ them:

Answer 40

A. CURRENCY = M1 & M2
B. MONEY MARKET MUTUAL FUNDS = M2 only
C. US T-BILLS = NEITHER
D. SMALL DENOMINATION = M2
E. LARGE-CAP MUTUAL FUNDS = NONE
F. CHECKABLE DEPOSITS = BOTH

Question 41

Which of the following is not included in the M1 monetary​ aggregate?

Answer 41

MONEY MARKET DEPOSIT ACCOUNTS

M1 includes​ currency, checking account​ deposits, and​ traveler’s checks.

Question 42

Which of the following is not included in​ M2?

Answer 42

LARGE-DENOMINATION TIME DEPOSITS

M2 includes those in M1 plus assets that have​ check-writing features as well as other assets that can be turned into cash quickly at very little cost.

Question 43

Which of the following statements about the monetary aggregates is FALSE?

Answer 43

it is false to say when the growth rate of M2 increases, the growth rate of M1 must decrease.