Chapter 2

Question 1

1) By “specialization” economists mean a situation where
A) individuals produce the goods or services for which they have relatively the best ability.
B) goods are traded directly for goods and money is not used.
C) individuals who produce goods do not also produce services and individuals who produce services do not also produce goods.
D) individuals are assigned to occupations on the basis of tests that gauge their relative abilities.

Answer 1

A) individuals produce the goods or services for which they have relatively the best ability.

Question 2

2) Fundamentally, to reap the benefits of specialization, an economy must
A) be heavily industrial.
B) be heavily agricultural.
C) have an extensive system of higher education.
D) develop ways for individuals to trade goods with one another.

Answer 2

D) develop ways for individuals to trade goods with one another.

Question 3

3) Barter is
A) another name for money.
B) an exchange of goods and services directly for goods and services.
C) the basis for economic specialization.
D) the main system of exchange in the United States today.

Answer 3

B) an exchange of goods and services directly for goods and services.

Question 4

4) Which of the following is an example of a barter transaction?
A) An individual pays her electric bill with a check.
B) An individual pays her electric bill with currency.
C) An individual provides three light bulbs to her neighbor in exchange for two gallons of milk.
D) An individual deposits three twenty-dollar bills in her checking account.

Answer 4

C) An individual provides three light bulbs to her neighbor in exchange for two gallons of milk.

Question 5

5) A system of barter has substantial transactions costs because
A) taxes under such a system are generally a large fraction of the value of output.
B) traders must spend considerable time searching for trading partners.
C) the uncertainties of trade result in high legal fees being incurred to draw up binding contracts.
D) the uncertainties of trade result in high insurance premiums.

Answer 5

B) traders must spend considerable time searching for trading partners.

Question 6

6) Under a barter system
A) each good has many prices.
B) each good has a single price.
C) no prices for goods exist.
D) prices for goods are very stable.

Answer 6

A) each good has many prices.

Question 7

7) How many prices would there be in a barter economy with 100 goods? 
A) 100
B) 1,000
C) 4,950
D) 10,000

Answer 7

C) 4,950

Question 8

8) Andy can’t make a deal with Danny. Andy has a Alex Rodriguez baseball card and would like to trade it to Danny for Danny’s Albert Pujols card, but Danny doesn’t want a Alex Rodriquez card. Andy’s problem illustrates the drawback to a barter system known as
A) the specialization problem.
B) the double coincidence of wants problem.
C) the many prices problem.
D) the transactions problem.

Answer 8

B) the double coincidence of wants problem.

Question 9

9) In Moscow in 1989, what were taxi drivers using as a medium of exchange? 
A) Russian rubles
B) Marlboro cigarettes
C) gold coins 
D) caviar

Answer 9

B) Marlboro cigarettes

Question 10

10) Using a good as a medium of exchange confers the benefit that
A) the need to quote so many prices in trade is reduced.
B) the need for a double coincidence of wants is greatly increased.
C) the need for specialization is reduced.
D) transactions costs are increased, but they now may be paid in money terms.

Answer 10

A) the need to quote so many prices in trade is reduced.

Question 11

11) Commodity money can best be described as
A) money used to purchase agricultural products
B) a good used as money that also has value independent of its use as money
C) standardized goods like gold that trade in a financial market
D) the form of money used in a barter system

Answer 11

B) a good used as money that also has value independent of its use as money

Question 12

12) When economists refer to the role of money as a unit of account, they mean that
A) most accounting systems reflect that goods are purchased with currency.
B) most accounting systems reflect that goods are purchased with checks.
C) money gives traders a way of measuring value in the economy.
D) money makes it possible for specialization to take place.

Answer 12

C) money gives traders a way of measuring value in the economy.

Question 13

13) In comparing money to shares of Apple stock, we can say that
A) money is a store of value, but shares of Apple stock are not.
B) shares of Apple stock are a store of value, but money is not.
C) both money and shares of Apple stock are stores of value.
D) neither money nor shares of Apple stock are stores of value.

Answer 13

C) both money and shares of Apple stock are stores of value.

Question 14

14) Suppose $100 buys less in the year 2013 than in 2000. Then we can say that
A) money’s store of value has decreased.
B) money’s store of value has increased.
C) the economy must have been growing rapidly between 2000 and 2013.
D) the economy must have been growing slowly between 2000 and 2013.

Answer 14

A) money’s store of value has decreased.

Question 15

15) Fiat money
A) is money that would have no value if it were not usable as money.
B) is illegal in most advanced, industrial countries.
C) is usually some type of precious metal.
D) will generally be accepted in trade for less than its face value.

Answer 15

A) is money that would have no value if it were not usable as money.

Question 16

16) By designating Federal Reserve currency as legal tender, the federal government
A) has ensured that Federal Reserve currency will serve as money.
B) has guaranteed that Federal Reserve currency may be exchanged for an equivalent amount of gold or silver.
C) has mandated that Federal Reserve currency be accepted for payment of debts.
D) has mandated that Federal Reserve currency be accepted by citizens of foreign countries in exchange for their countries’ currencies.

Answer 16

C) has mandated that Federal Reserve currency be accepted for payment of debts.

Question 17

17) A person's earnings over a period of time is known as 
A) money
B) income
C) wealth
D) all of the above

Answer 17

B) income

Question 18

18) The payments system is
A) the mechanism for conducting economic transactions.
B) another name for the system of foreign exchange rates.
C) the phrase used to describe how transactions are carried out in an economy that does not use money.
D) the way in which economic transactions are carried out in a government-controlled economy, such as the former Soviet Union.

Answer 18

A) the mechanism for conducting economic transactions.

Question 19

19) Checks are
A) not acceptable for settling transactions in most industrialized countries.
B) less important than currency as a means of settling transactions.
C) promises to pay on demand money deposited with a financial institution.
D) promises to pay coins minted from precious metals on demand.

Answer 19

C) promises to pay on demand money deposited with a financial institution.

Question 20

20) Automatic teller machines and debit cards are examples of
A) electronic funds transfer systems.
B) commodity monies.
C) legal tender in the United States. 
D) modern barter systems.

Answer 20

A) electronic funds transfer systems.

Question 21

21) The M2 aggregate
A) includes M1 plus short-term investment accounts.
B) includes M1 plus large-denomination time deposits.
C) equals currency plus checking account deposits at commercial banks.
D) is the best definition of money purely as a medium of exchange.

Answer 21

A) includes M1 plus short-term investment accounts.

Question 22

22) Money market deposit accounts are included in 
A) only M1.
B) only M2.
C) M1 and M2.
D) neither M1 nor M2.

Answer 22

B) only M2.

Question 23

23) Suppose the GDP implicit price deflator was 112.7 in 2013 and 116.0 in 2014. Therefore, the inflation rate in 2014 would be
A) 2.8%.
B) 2.9%.
C) 3.3%. 
D) 16%.

Answer 23

B) 2.9%.

Question 24

24) A hyperinflation occurs when
A) inflation persists for more than two years.
B) inflation persists for more than five years.
C) the inflation rate exceeds 50% per year.
D) the inflation rate exceeds 50% per month

Answer 24

D) the inflation rate exceeds 50% per month

Question 25

25) The velocity of money can best be described as
A) how quickly prices are increasing.
B) how quickly output is increasing.
C) the number of times each dollar in the money supply is used to buy goods and services included in GDP.
D) the growth rate of the money supply.

Answer 25

C) the number of times each dollar in the money supply is used to buy goods and services
included in GDP.

Question 26

26) Suppose nominal GDP is $14 trillion and the money supply is $2 trillion. What is the velocity of money?
A) 0.143
B) 7
C) 12 
D) 28

Answer 26

B) 7

Question 27

27) Who benefits from rising inflation?
A) those who already have fixed-rate loans
B) those considering taking out a loan
C) lenders that already made loans
D) lenders considering whether to make new loans

Answer 27

A) those who already have fixed-rate loans

Question 28

28) The purchasing power of money
A) rises when prices fall.
B) rises when prices rise.
C) is set by the Fed in January of each year. 
D) is constant.

Answer 28

A) rises when prices fall.