Chapter 3

Question 1

Money

Answer 1

anything that is generally accepted as payment for goods or services or in the repayment of debts

Question 2

Wealth

Answer 2

the total collection of pieces of property that serve to store value

Question 3

Income

Answer 3

flow of earnings per unit of time (a flow concept)

Question 4

Function of money: Medium of exchange

Answer 4

Eliminates the trouble of finding a double coincidence of needs (reduces transaction costs); promotes specialization; must be easily standardized, be widely accepted, be divisible, be easy to carry, not deteriorate quickly

Question 5

Function of money: Unit of account

Answer 5

Used to measure value in the economy; Reduces transaction costs

Question 6

Function of money: Store of value

Answer 6

Used to save purchasing power over time; Other assets also serve this function; Money is the most liquid of all assets but loses value during inflation

Question 7

Commodity money

Answer 7

valuable, easily standardized and divisible commodities (e.g. precious metals, cigarettes)

Question 8

Fiat money

Answer 8

paper money decreed by governments as legal tender

Question 9

Check

Answer 9

an instruction to your bank to transfer money from your account

Question 10

M1

Answer 10

(most liquid assets) = currency + traveler’s checks + demand deposits + other checkable deposits

Question 11

M2

Answer 11

(adds to M1 other assets that are not so liquid) = M1 + small denomination time deposits + savings deposits and money market deposit accounts + money market mutual fund shares