Chapter 10 Test

Question 1

What term implies that a merchant must accept in the payment of debts whatever the government declares to be money?

Answer 1

Legal tender

Question 2

What three functions does money serve?

Answer 2

1) a means of payment for goods and services
2) a measure of value
3) a means of storing purchasing power

Question 3

What characteristics should an effective monetary system possess?

Answer 3

1) convenience
2) portability
3) divisibility
4) durability
5) stability

Question 4

What are the three kinds of money that can circulate in an economy?

Answer 4

1) commodity money
2) representative money
3) fiat money

Question 5

Name the two measures of the money supply discussed in the book and list what each includes.

Answer 5

1) M-1: comprises paper currency, coins, traveler’s checks, and checking accounts
2) M-2: comprises a variety of savings accounts and M-1

Question 6

What does it mean to say that the United States has a dual banking system?

Answer 6

There are banks regulated by state charters and banks regulated by national charters

Question 7

What are the three functions of commercial banks?

Answer 7

1) accepting deposits
2) extending loans
3) providing miscellaneous services

Question 8

Which type of thrift usually originates with a group of people who have something in common (usually employment)?

Answer 8

Credit unions

Question 9

Give an example of a contractual saving institution.

Answer 9

Insurance companies

Question 10

Name an advantage and a disadvantage of the traditional money system used on Yap Islands.

Answer 10

Advantage- very easily identifiable

Disadvantage- lack of portability

Question 11

How does money act as a store of purchasing power?

Answer 11

By keeping its face value, money can be received and exchanged for something at one time and for something of comparable value at a later time

Question 12

Which characteristic of money do you consider the most important and why?

Answer 12

Think about it: choose from convenience, portability, stability, divisibility, durability, etc

Question 13

Are today’s coins full-bodied or token coins? Explain.

Answer 13

Token coins, because the metal in them is of less value than their face value

Question 14

What is the name given to unbanked money when it is issued by a government decree?

Answer 14

Fiat money

Question 15

What two factors keep the fiat system functioning?

Answer 15

1) faith that others will accept the money that we have accepted
2) a limited quantity of that money

Question 16

What type of money does the United States currently use?

Answer 16

Fiat money

Question 17

Why can commercial banks also be referred to as full-service banks? Give examples.

Answer 17

They offer a wide range of service to their customers, such as checking and savings accounts, debit and credit cards

Question 18

For what economic position was Milton Friedman a leading spokesman and what did that position see as the principle cause for inflation?

Answer 18

Advocated the monetarist approach and the principle cause for inflation was the money supply