Ch 3 Questions Flashcards
Properly categorize each of the following concepts:
Money
stock variable
A flow variable (income)
A flow variable is measured per unit of time.
Income
Flow variable
Savings deposits
Stock variable:
Stock variables (Savings deposits, debt)
Stock variables are measured at a point in time. They are often referred to as snapshot variables.
Wealth
Stock variable:
Debt
Stock variable
Money
Stock Variable
Which of the following is measured as a flow per unit of time?
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.
Wealth
Wealth represents all resources owned by an individual, including all assets.
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.
In this case, money is being used as a
medium of exchange
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.
unit of account
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
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?
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.
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?
Gold has intrinsic value when compared to cheques
In ancient Greece, what property made gold a more likely candidate for use as money than wine?
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
It is not unusual to find a business that displays a sign saying “no personal checks, please.”
Based on this observation, a checking account must be
less liquid
than currency.
When money is used as acceptance for payment of goods and services, it is being used as a
medium of exchange
When money is used to express the relative value of goods and services, it is being used as a
unit of account
When money is used to hold purchasing power for future use, it is being used as a
store of value
Which of the following is not a purpose or function of money?
Money has three primary functions in any economy: as a medium of exchange, as a unit of account, and as a store of value.
A payments system based on money is
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.
is the relative ease and speed with which an asset can be converted into cash.
Liquidity is the relative ease and speed with which an asset can be converted into cash.
is the most liquid store of value in the economy.
Money is the most liquid store of value.
We know that money is the most liquid store of value due to many reasons except that
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.
An asset with great liquidity is one that
An asset with great liquidity is one that can be converted into a medium of exchange with relative ease and speed.
Hyperinflation
are periods of extreme inflation.
During hyperinflation, the quantity of money needed to purchase the most basic items are
excessive since money is
losing its value rapidly.
Which of the following economies has the most efficient payments system?
An economy using checks
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
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
Which of the following represents an advantage of using commodity money for transactions?
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.
Try Again
Which of the following is a disadvantage of using fiat money ?
Public authorities may be tempted to produce too much of it
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.
What is the main disadvantage of moving to e-money or moving to a cashless society?
There are problems with security and privacy
Which of the following is an example of fiat money?
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.
Which of the following statements about fiat money is false?
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.
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.
Rank the following assets from most liquid (1) to least liquid (6)
- CURRENCY
- CHECKING
- SAVINGS DEPOSITS
- COMMON STOCK
- CARS
- HOUSES
Which of the Federal Reserves measures of the monetary AGGREGATES —M1 or M2—is composed of the most liquid assets? Which is the larger measure?
All else equal, M1 is the monetary aggregate composed of the most liquid assets and M2 is the larger measure.
For each of the following assets, indicate which, if any, of the monetary aggregates includes them:
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
Which of the following is not included in the M1 monetary aggregate?
MONEY MARKET DEPOSIT ACCOUNTS
M1 includes currency, checking account deposits, and traveler’s checks.
Which of the following is not included in M2?
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.
Which of the following statements about the monetary aggregates is FALSE?
it is false to say when the growth rate of M2 increases, the growth rate of M1 must decrease.
