Chapter 26.1

Question 1

The function of money in an economy is to serve as 
1) a unit of account;
2) a store of value;
3) a medium of exchange.
A) 1 and 2
B) 2 and 3
C) 1 and 3
D) 1, 2, and 3
E) 3 only

Answer 1

D

Question 2

Money is commonly defined as
A) a generally accepted medium of exchange.
B) gold.
C) foreign-exchange reserves.
D) paper currency.
E) the Canadian dollar.

Answer 2

A

Question 3

In order to be considered “money,” paper currency must be
A) convertible into a precious metal.
B) impossible to counterfeit.
C) issued by a chartered bank.
D) issued by a government agency.
E) generally acceptable as a medium of exchange.

Answer 3

E

Question 4

Doug is saving money in order to purchase a new snowboard next winter. This represents using money as
A) a medium of exchange.
B) a store of value.
C) a unit of account.
D) a medium of deferred payment.
E) method of barter.

Answer 4

B

Question 5

Other things being equal, a rise in the price level will
A) increase the value of money.
B) decrease the purchasing power of money.
C) stabilize the value of money.
D) increase the purchasing power of money.
E) have no effect on the value of money.

Answer 5

B

Question 6

Other things being equal, the purchasing power of money is
A) inversely related to the level of aggregate demand.
B) inversely related to the price level.
C) directly related to the price level.
D) directly related with the cost of living.
E) directly related to the level of aggregate demand.

Answer 6

B

Question 7

When you are estimating your monthly income and expenses, money is being used as 
A) a medium of exchange. 
B) a store of value.
C) a unit of account.
D) a standard unit of deferred payment.
E) a money substitute.

Answer 7

C

Question 8

Doug compares the unit price of chocolate bars in order to get the "best buy." This represents using money as
A) a medium of exchange.
B) a store of value.
C) a unit of account.
D) a unit of deferred payment.
E) a money substitute.

Answer 8

C

Question 9

The major advantage of using money rather than barter is that
A) in the barter system there is no way to express values of commodities.
B) money is the only convenient way to store one’s wealth.
C) money has more value than real goods.
D) money stays where you put it, whereas a cow often has to be fenced in.
E) the use of money significantly reduces transactions costs.

Answer 9

E

Question 10

The biggest disadvantage of a barter system compared to one that uses money is that
A) it is difficult to find goods to trade in a barter system that satisfy the needs of society.
B) a standardized unit of account cannot exist in a barter system.
C) all commodities are difficult to transport and therefore inefficient for exchange.
D) each trade requires a double coincidence of wants.
E) commodities are difficult to use as a store of value.

Answer 10

D

Question 11

Which of the following is an example of the use of money as a medium of exchange?
A) Dave keeps $250 in his drawer for a “rainy day.”
B) Mike gets a friend to give him a beer today in return for promising to give the friend two beer when Mike gets paid at the end of the month.
C) Judy lends her car to a friend who signs a promissory note that she will pay Judy $10 a day for the use of the car after she returns the car to Judy.
D) Barry pays $275 with his bank debit card for tickets for an NHL play-off game.
E) ABC Investments Inc. enters in its account books that it owes Nallai $20 for his last month’s investment income.

Answer 11

D

Question 12

If a majority of Canadian households and businesses refused to accept Canadian dollars in exchange for goods and services, the value of the Canadian dollar would
A) fall.
B) rise since less would be in circulation.
C) stay constant since the value does not depend on its acceptability by people.
D) stay constant since its value is determined only by the Bank of Canada.
E) stay constant since its value is determined only by the Government of Canada.

Answer 12

A

Question 13

In order for money to be successfully used as a medium of exchange, it must
1) be readily acceptable;
2) be easily divisible;
3) have a high value-weight ratio.
A) 1 only
B) 2 only
C) 3 only
D) 1 and 2
E) 1, 2, and 3

Answer 13

E

Question 14

The use of money in an economy does which of the following?
A) creates the necessity for a double coincidence of wants
B) solves the problem of inflation
C) creates a problem of trading a portion of indivisible commodities such as a ship
D) promote specialization and the division of labour
E) promotes the use of barter

Answer 14

D

Question 15

When metal coins, such as gold and silver, were used as money, a technique which helped to prevent the reduction of their value through clipping was 
A) basing.
B) re-minting.
C) milling.
D) debasement.
E) sweating.

Answer 15

C

Question 16

Historically, when gold and silver coins were used as money, their debasement resulted in
A) deflation.
B) an increase in the supply of money.
C) an increase in the amount of gold bullion.
D) an increase in the desire to store wealth by holding coins.
E) a decrease in the money supply.

Answer 16

B

Question 17

Gresham’s law predicts that
A) good money drives out bad money.
B) debased money will circulate with undebased money.
C) undebased money will be driven from circulation.
D) debased money will be driven from circulation.
E) money is neutral in the long run.

Answer 17

C

Question 18

Which of the following is consistent with the predictions of Gresham’s law?
A) An increase in the money supply will be followed by inflation.
B) The increased circulation of U.S. coins in Canada during periods when the Canadian dollar is worth significantly less than the U.S. dollar.
C) Debasement of a metallic money will be followed by inflation.
D) Increases in the money supply led to the hyperinflation of the 1920s in Germany.
E) The disappearance of U.S. coins circulating in Canada during periods when the Canadian dollar is worth less than the U.S. dollar.

Answer 18

E

Question 19

Which of the following was the most important initial step in the evolution of paper currency?
A) the acceptance of bank notes
B) the acceptance of goldsmiths’ receipts
C) the acceptance of metallic coins
D) the issuance of currency by governments
E) the use of the Gold Standard

Answer 19

B

Question 20

Suppose an economy has two types of money - gold and silver coins - that are both legal tender but have different non-monetary values. Gresham’s law has come into effect when
A) people refuse to use the coins of lesser value.
B) the value of the coins is in the same ratio as their non-monetary values.
C) the lower-valued coin is taken out of circulation.
D) the higher-valued coin is taken out of circulation.
E) people use the higher-valued coins for exchange and the lower-valued for savings.

Answer 20

D

Question 21

What do we mean in our current banking system when we say that a currency is “fractionally backed”?
A) Banks have many more claims outstanding against them than they have reserves available to pay those claims.
B) The currency is partially backed by the nation’s supply of gold.
C) A bank’s currency is fractionally backed by its supply of gold.
D) All paper currency is convertible to gold.
E) Banks maintain a fixed fraction of their outstanding deposits as cash deposits with the central bank.

Answer 21

A

Question 22

The major problem of a currency that is fractionally backed and convertible into a precious metal is that of
A) clipping, which debases the metal coins.
B) counterfeiting.
C) maintaining its convertability into the metal.
D) paper money being less durable than gold.
E) perennial shortages of paper currency.

Answer 22

C

Question 23

Most Canadians accept Canadian dollars in payment for goods and services in Canada because they have confidence that the dollar
A) will be accepted in the future.
B) is fully convertible into gold.
C) is accepted by foreigners as more stable than their own currency.
D) is fully convertible into American dollars at a set exchange rate.
E) is fully backed by the British pound sterling.

Answer 23

A

Question 24

Fiat money has value because it
A) can be manufactured at will by the issuing government.
B) has intrinsic value equal to its face value.
C) is fully backed by gold at a fixed ratio.
D) is only fractionally backed by gold.
E) is generally accepted.

Answer 24

E

Question 25

For a country to be on a “gold standard,” it must
A) use gold coins as money.
B) use gold coins as money and promise never to debase its coins.
C) use gold as money, but not necessarily in the form of gold coins.
D) make its currency convertible into gold at a fixed rate of exchange.
E) use gold as fiat money.

Answer 25

D

Question 26

If most individuals accept paper currency in transactions, and paper currency is convertible into gold, then banks can safely issue
A) no more paper currency than the value of the gold they hold.
B) more paper currency than the value of the gold they hold.
C) as much paper currency as they please.
D) paper currency equal to a fraction of the gold they hold.
E) paper currency equal to the bank’s commercial debt divided by their gold reserves.

Answer 26

B

Question 27

The currency that is in circulation in Canada today is
A) fully backed by gold held at the central bank.
B) backed by the U.S. dollar.
C) backed by the euro.
D) fractionally backed by gold.
E) not officially backed by anything.

Answer 27

E

Question 28

Which of the following illustrates the use of fiat money?
A) exchanging Canadian dollars for a T-shirt
B) exchanging money-market funds for gold
C) exchanging money-market funds for insurance
D) keeping gold as a hedge against inflation
E) bartering goods for services

Answer 28

A

Question 29

Debit cards that are issued by commercial banks can be characterized as
A) an example of near money.
B) an electronic version of a cheque.
C) deposit money.
D) fiat money.
E) a store of value.

Answer 29

B

Question 30

In recent years, the use of debit cards issued by commercial banks has skyrocketed. When you pay for a purchase at a store using a debit card, you are
A) authorizing the transfer of cash from your bank account to the merchant’s bank account.
B) creating an electronic debt to the merchant.
C) authorizing an electronic transfer of a money substitute from you to the merchant.
D) authorizing an electronic transfer of deposit money from you to the merchant.
E) authorizing the transfer of bank notes from you to the merchant.

Answer 30

D

Question 31

Which of the following statements about deposit money is true?
A) The quantity of fiat money in the Canadian economy far exceeds the quantity of deposit money.
B) Deposit money can legally be created solely by the Bank of Canada.
C) Deposit money is the paper money or coinage that is decreed by the government to be accepted as legal tender.
D) Deposit money is recorded as an asset on the balance sheet of a commercial bank.
E) The quantity of deposit money in the Canadian economy far exceeds the quantity of fiat money in circulation.

Answer 31

E