3.1 Meaning of Money
1) E conomists find no completely satisfactory way to measure money because
A) m oney supply statistics are a state secret.
B) t he Federal Reserve does not employ or report different measures of the money supply.
C) t he "moneyness" or liquidity of an asset is a matter of degree.
D) e conomists find disagreement interesting and refuse to agree for ideological reasons.
Answer:
Ques Status: Previous Edition
2) T o an economist, ________ is anything that is generally accepted in payment for goods and services or in the
repayment of debt.
A) w ealth
B) i ncome
C) m oney
D) c redit
Answer
Ques Status: New
3) C urrency includes
A) p aper money and coins.
B) p aper money, coins, and checks.
C) p aper money and checks.
D) p aper money, coins, checks, and savings deposits.
Answer:
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4) T he difference between money and income is that
A) m oney is a flow and income is a stock.
B) m oney is a stock and income is a flow.
C) t here is no difference money and income are both stocks.
D) t here is no difference money and income are both flows.
Answer:
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5) I t is true that
A) i ncome and wealth are both stocks.
B) m oney and income are both stocks.
C) i ncome is a flow and wealth is a stock.
D) m oney and wealth are both flows.
Answer:
Ques Status: Revised
6) A n individual's annual salary is her
A) m oney.
B) i ncome.
C) w ealth.
D) l iabilities.
Answer:
Ques Status: Revised
7) A person's house is part of her
A) m oney.
B) i ncome.
C) l iabilities.
D) w ealth.
Answer:
Ques Status: Revised
8) M oney is
A) a nything that is generally accepted in payment for goods and services or in the repayment of debt.
B) a flow of earnings per unit of time.
C) t he total collection of pieces of property that are a store of value.
D) a lways based on a precious metal like gold or silver.
Answer:
Ques Status: Revised
9) W hich of the following are true statements?
A) W ealth is a stock variable.
B) M oney is a flow variable.
C) I ncome is a stock variable.
D) W ealth is a flow variable.
Answer:
Ques Status: Revised
10) ________ is used to make purchases while ________ is the total collection of pieces of property that serve to
store value.
A) M oney; income
B) W ealth; income
C) I ncome; money
D) M oney; wealth
Answer:
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11) ________ is a flow of earnings per unit of time.
A) I ncome
B) M oney
C) W ealth
D) C urrency
Answer:
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12) W hich of the following statements uses the economists' definition of money?
A) I plan to earn a lot of money over the summer.
B) B etsy is rich she has a lot of money.
C) I hope that I have enough money to buy my lunch today.
D) T he job with New Company gave me the opportunity to earn more money.
Answer:
Ques Status: New
3.2 Functions of Money
1) O f money's three functions, the one that distinguishes money from other assets is its function as a
A) s tore of value.
B) u nit of account.
C) s tandard of deferred payment.
D) m edium of exchange.
Answer:
Ques Status: Previous Edition
2) I f peanuts serve as a medium of exchange, a unit of account, and a store of value, then peanuts are
A) b ank deposits.
B) r eserves.
C) m oney.
D) l oanable funds.
Answer:
Ques Status: Revised
3) T he conversion of a barter economy to one that uses money
A) i ncreases efficiency by reducing the need to exchange goods and services.
B) i ncreases efficiency by reducing the need to specialize.
C) i ncreases efficiency by reducing transactions costs.
D) d oes not increase economic efficiency.
Answer:
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4) W hen compared to exchange systems that rely on money, disadvantages of the barter system include:
A) t he requirement of a double coincidence of wants.
B) l owering the cost of exchanging goods over time.
C) l owering the cost of exchange to those who would specialize.
D) e ncouraging specialization and the division of labor.
Answer:
Ques Status: Revised
5) W hen economists say that money promotes ________, they mean that money encourages specialization and
the division of labor.
A) b argaining
B) c ontracting
C) e fficiency
D) g reed
Answer:
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6) W hich of the following statements best explains how the use of money in an economy increases economic
efficiency?
A) M oney increases economic efficiency because it is costless to produce.
B) M oney increases economic efficiency because it discourages specialization.
C) M oney increases economic efficiency because it decreases transactions costs.
D) M oney cannot have an effect on economic efficiency.
Answer:
Ques Status: Revised
7) For a commodity to function effectively as money it must be
A) e asily standardized, making it easy to ascertain its value.
B) d ifficult to make change.
C) d eteriorate quickly so that its supply does not become too large.
D) h ard to carry around.
Answer:
Ques Status: Revised
8) A ll but the most primitive societies use money as a medium of exchange, implying that
A) t he use of money is economically efficient.
B) b arter exchange is economically efficient.
C) b arter exchange cannot work outside the family.
D) i nflation is not a concern.
Answer:
Ques Status: Revised
9) W hatever a society uses as money, the distinguishing characteristic is that it must
A) b e completely inflation proof.
B) b e generally acceptable as payment for goods and services or in the repayment of debt.
C) c ontain gold.
D) b e produced by the government.
Answer:
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10) ________ are the time and resources spent trying to exchange goods and services.
A) B argaining costs.
B) T ransaction costs.
C) C ontracting costs.
D) B arter costs.
Answer:
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11) C ompared to an economy that uses a medium of exchange, in a barter economy
A) t ransaction costs are higher.
B) t ransaction costs are lower.
C) l iquidity costs are higher.
D) l iquidity costs are lower.
Answer:
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12) M oney ________ transaction costs, allowing people to specialize in what they do best.
A) r educes
B) i ncreases
C) e nhances
D) e liminates
Answer:
Ques Status: New
13) K evin purchasing concert tickets with his debit card is an example of the ________ function of money.
A) m edium of exchange
B) u nit of account
C) s tore of value
D) s pecialization
Answer:
Ques Status: New
14) When money prices are used to facilitate comparisons of value, money is said to function as a
A) u nit of account.
B) m edium of exchange.
C) s tore of value.
D) p ayments-system ruler.
Answer:
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15) B ecause it is a unit of account, money
A) i ncreases transaction costs.
B) r educes the number of prices that need to be calculated.
C) d oes not earn interest.
D) d iscourages specialization.
Answer:
Ques Status: Revised
16) A problem with barter exchange when there are many goods is that in a barter system
A) t ransactions costs are minimized.
B) t here exists a multiple number of prices for each good.
C) t here is only one store of value.
D) e xchange of services is impossible.
Answer:
Ques Status: Revised
17) I n a barter economy the number of prices in an economy with N goods is
A) [N(N - 1)]/2.
B) N(N/2).
C) 2N.
D) N(N/2) - 1.
Answer:
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18) D ennis notices that jackets are on sale for $99. In this case money is functioning as a ________.
A) m edium of exchange
B) u nit of account
C) s tore of value
D) p ayments-system ruler
Answer:
Ques Status: New
19) I f there are five goods in a barter economy, one needs to know ten prices in order to exchange one good for
another. If, however, there are ten goods in a barter economy, then one needs to know ________ prices in
order to exchange one good for another.
A) 20
B) 25
C) 30
D) 45
Answer:
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20) If there are four goods in a barter economy, then one needs to know ________ prices in order to exchange one
good for another.
A) 8
B) 6
C) 5
D) 4
Answer:
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21) B ecause it is a store of value, money
A) d oes not earn interest.
B) c annot be a durable asset.
C) m ust be currency.
D) i s a way of saving for future purchases.
Answer:
Ques Status: Revised
22) P atrick places his pocket change into his savings bank on his desk each evening. By his actions, Patrick
indicates that he believes that money has a ________ function.
A) m edium of exchange
B) u nit of account
C) s tore of value
D) s pecialization
Answer:
Ques Status: New
23) ________ is the relative ease and speed with which an asset can be converted into a medium of exchange.
A) E fficiency
B) L iquidity
C) D eflation
D) S pecialization
Answer:
Ques Status: New
24) I ncreasing transactions costs of selling an asset make the asset
A) m ore valuable.
B) m ore liquid.
C) l ess liquid.
D) m ore moneylike.
Answer:
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25) O f the following assets, the least liquid is
A) s tocks.
B) t raveler's checks.
C) c hecking deposits.
D) a house.
Answer:
Ques Status: Revised
26) Ranking assets from most liquid to least liquid, the correct order is
A) s avings bonds; house; currency.
B) c urrency; savings bonds; house.
C) c urrency; house; savings bonds.
D) h ouse; savings bonds; currency.
Answer:
Ques Status: Revised
27) P eople hold money even during inflationary episodes when other assets prove to be better stores of value.
This can be explained by the fact that money is
A) e xtremely liquid.
B) a unique good for which there are no substitutes.
C) t he only thing accepted in economic exchange.
D) b acked by gold.
Answer:
Ques Status: Revised
28) I f the price level doubles, the value of money
A) d oubles.
B) m ore than doubles, due to scale economies.
C) r ises but does not double, due to diminishing returns.
D) f alls by 50 percent.
Answer:
Ques Status: Previous Edition
29) A fall in the level of prices
A) d oes not affect the value of money.
B) h as an uncertain effect on the value of money.
C) i ncreases the value of money.
D) r educes the value of money.
Answer:
Ques Status: Revised
30) D uring hyperinflations,
A) t he value of money rises rapidly.
B) m oney no longer functions as a good store of value and people may resort to barter transactions on a
much larger scale.
C) m iddle-class savers benefit as prices rise.
D) m oney's value remains fixed to the price level; that is, if prices double so does the value of money.
Answer:
Ques Status: Revised
31) B ecause inflation in Nicaragua in 1990 topped 13,000 percent, one can conclude that the Nicaraguan economy
suffered from
A) d eflation.
B) d isinflation.
C) h yperinflation.
D) s uperdeflation.
Answer:
Ques Status: Previous Edition
32) If merchants in the country Zed choose to close their doors, preferring to be stuck with rotting merchandise
rather than worthless currency, then one can conclude that Zed is experiencing a
A) s uperdeflation.
B) h yperdeflation.
C) d isinflation.
D) h yperinflation.
Answer:
Ques Status: Previous Edition
33) E xplain how cigarettes could be called "money" in prisoner-of-war camps of World War II.
Answer:
Ques Status: New
3.3 Evolution of The Payments System
1) C ompared to checks, paper currency and coins have the major drawbacks that they
A) a re easily stolen.
B) a re hard to counterfeit.
C) a re not the most liquid assets.
D) m ust be backed by gold.
Answer:
Ques Status: Revised
2) A s the payments system evolves from barter to a monetary system,
A) c ommodity money is likely to precede the use of paper currency.
B) t ransaction costs increase.
C) t he number of prices that need to be calculated increase rather dramatically.
D) s pecialization decreases.
Answer:
Ques Status: Revised
3) A disadvantage of ________ is that it is very heavy and hard to transport from one place to another.
A) c ommodity money
B) f iat money
C) e lectronic money
D) p aper money
Answer:
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4) P aper currency that has been declared legal tender but is not convertible into coins or precious metals is called
________ money.
A) c ommodity
B) f iat
C) e lectronic
D) f unny
Answer:
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5) W hen paper currency is decreed by governments as legal tender, legally it must be ________.
A) p aper currency backed by gold
B) a precious metal such as gold or silver
C) a ccepted as payment for debts
D) c onvertible into an electronic payment
Answer:
Ques Status: New
6) T he evolution of the payments system from barter to precious metals, then to fiat money, then to checks can
best be understood as a consequence of
A) g overnment regulations designed to improve the efficiency of the payments system.
B) g overnment regulations designed to promote the safety of the payments system.
C) i nnovations that reduced the costs of exchanging goods and services.
D) c ompetition among firms to make it easier for customers to purchase their products.
Answer:
Ques Status: Revised
7) The evolution of the payments system from barter to precious metals, then to fiat money, then to checks can
best be understood as a consequence of the fact that
A) p aper is more costly to produce than precious metals.
B) p recious metals were not generally acceptable.
C) p recious metals were difficult to carry and transport.
D) p aper money is less accepted than checks.
Answer:
Ques Status: Revised
8) W hich of the following sequences accurately describes the evolution of the payments system?
A) B arter, coins made of precious metals, paper currency, checks, electronic funds transfers
B) B arter, coins made of precious metals, checks, paper currency, electronic funds transfers
C) B arter, checks, paper currency, coins made of precious metals, electronic funds transfers
D) B arter, checks, paper currency, electronic funds transfers
Answer:
Ques Status: Previous Edition
9) I n explaining the evolution of money
A) g overnment regulation is the most important factor.
B) c ommodity money, because it is valued more highly, tends to drive out paper money.
C) n ew forms of money evolve to lower transaction costs.
D) p aper money is always backed by gold and therefore more desirable than checks.
Answer:
Ques Status: Revised
10) D uring the past two decades an important characteristic of the modern payments system has been the rapidly
increasing use of
A) c hecks and decreasing use of currency.
B) e lectronic fund transfers.
C) c ommodity monies.
D) f iat money.
Answer:
Ques Status: Revised
11) C ompared to an electronic payments system, a payments system based on checks has the major drawback
that
A) c hecks are less costly to process.
B) c hecks take longer to process, meaning that it may take several days before the depositor can get her
cash.
C) f raud may be more difficult to commit when paper receipts are eliminated.
D) l egal liability is more clearly defined.
Answer:
Ques Status: Revised
12) A smart card is the equivalent of
A) c ash.
B) s avings bonds.
C) s avings deposits.
D) c ertificates of deposit.
Answer:
Ques Status: Revised
13) Which of the following is not a form of e-money?
A) a debit card
B) a credit card
C) a stored-value card
D) a smart card
Answer:
Ques Status: New
14) W hich of the following reasons would not explain why electronic payments have been slow to displace the
paper payments system?
A) e xpensive equipment is necessary to set up the system
B) s ecurity concerns
C) p rivacy concerns
D) t ransportation costs
Answer:
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15) W hat factors have slowed down the movement to a system where all payments are made electronically?
Answer:
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3.4 Measuring Money
1) R ecent financial innovation makes the Federal Reserve's job of conducting monetary policy
A) e asier, since the Fed now knows what to consider money.
B) m ore difficult, since the Fed now knows what to consider money.
C) e asier, since the Fed no longer knows what to consider money.
D) m ore difficult, since the Fed no longer knows what to consider money.
Answer:
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2) D efining money becomes ________ difficult as the pace of financial innovation ________.
A) l ess; quickens
B) m ore; quickens
C) m ore; slows
D) m ore; stops
Answer:
Ques Status: Revised
3) ________ is the narrowest monetary aggregate that the Fed reports.
A) M0
B) M1
C) M2
D) M3
Answer:
Ques Status: New
4) W hich of the following is not included in the measure of M1?
A) N OW accounts.
B) D emand deposits.
C) C urrency.
D) S avings deposits.
Answer:
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5) T he components of the U.S. M1 money supply are demand and checkable deposits plus
A) c urrency.
B) c urrency plus savings deposits.
C) c urrency plus travelers checks.
D) c urrency plus travelers checks plus money market deposits.
Answer:
Ques Status: Previous Edition
6) T he M1 measure of money includes
A) s mall denomination time deposits.
B) t raveler's checks.
C) m oney market deposit accounts.
D) m oney market mutual fund shares.
Answer:
Ques Status: Revised
7) The currency component includes paper money and coins held in ________.
A) b ank vaults
B) A TMs
C) t he hands of the nonbank public
D) t he central bank
Answer:
Ques Status: New
8) W hich of the following is not included in the monetary aggregate M2?
A) C urrency
B) S avings bonds
C) T raveler's checks
D) C hecking deposits
Answer:
Ques Status: Revised
9) W hich of the following is included in M2 but not in M1?
A) N OW accounts
B) D emand deposits
C) C urrency
D) M oney market mutual fund shares (retail)
Answer:
Ques Status: Revised
10) W hich of the following is not included in the M1 measure of money but is included in the M2 measure of
money?
A) C urrency
B) T raveler's checks
C) D emand deposits
D) S mall-denomination time deposits
Answer:
Ques Status: Previous Edition
11) W hich of the following is included in both M1 and M2?
A) C urrency
B) S avings deposits
C) S mall-denomination time deposits
D) M oney market deposit accounts
Answer:
Ques Status: Revised
12) O f the following, the largest is
A) m oney market deposit accounts.
B) d emand deposits.
C) M1.
D) M2.
Answer:
Ques Status: Revised
13) I f an individual redeems a U.S. savings bond for currency
A) M1 stays the same and M2 decreases.
B) M1 increases and M2 increases.
C) M1 increases and M2 stays the same.
D) M1 stays the same and M2 stays the same.
Answer:
Ques Status: Revised
14) I f an individual moves money from a small-denomination time deposit to a demand deposit account,
A) M1 increases and M2 stays the same.
B) M1 stays the same and M2 increases.
C) M1 stays the same and M2 stays the same.
D) M1 increases and M2 decreases.
Answer:
Ques Status: Previous Edition
15) I f an individual moves money from a demand deposit account to a money market deposit account,
A) M1 decreases and M2 stays the same.
B) M1 stays the same and M2 increases.
C) M1 stays the same and M2 stays the same.
D) M1 increases and M2 decreases.
Answer:
Ques Status: Previous Edition
16) I f an individual moves money from a savings deposit account to a money market deposit account,
A) M1 decreases and M2 stays the same.
B) M1 stays the same and M2 increases.
C) M1 stays the same and M2 stays the same.
D) M1 increases and M2 decreases.
Answer:
Ques Status: Previous Edition
17) I f an individual moves money from currency to a demand deposit account,
A) M1 decreases and M2 stays the same.
B) M1 stays the same and M2 increases.
C) M1 stays the same and M2 stays the same.
D) M1 increases and M2 stays the same.
Answer:
Ques Status: Previous Edition
18) I f an individual moves money from a money market deposit account to currency,
A) M1 increases and M2 stays the same.
B) M1 stays the same and M2 increases.
C) M1 stays the same and M2 stays the same.
D) M1 increases and M2 decreases.
Answer:
Ques Status: Previous Edition
19) S mall-denomination time deposits refer to certificates of deposit with a denomination of less than ________.
A) $1,000
B) $10,000
C) $100,000
D) $1,000,000
Answer:
Ques Status: New
20) T he growth rates of monetary aggregates
A) f ollow one another exactly.
B) t end to move together in the short run but not in the long run.
C) a re unrelated in the long run.
D) t end to move together in the long run but can diverge in the short run.
Answer:
Ques Status: Revised
21) T he decade during which the growth rates of monetary aggregates diverged the most is
A) t he 1960s.
B) t he 1970s.
C) t he 1980s.
D) t he 1990s.
Answer:
Ques Status: Revised
22) W hy are most of the U.S. dollars held outside of the United States?
Answer:
Ques Status: New
3.5 How Reliable Are the Money Data?
1) G enerally, the data initially reported by the Fed are
A) n ot a reliable guide to the short-run behavior of the money supply.
B) n ot a reliable guide to the long-run behavior of the money supply.
C) a reliable guide to the short-run behavior of the money supply.
D) u sually underestimate the revised statistics.
Answer:
Ques Status: Revised
2) A n examination of revised money supply statistics, when compared to the initial statistics, suggests that the
initial statistics
A) a re pretty good.
B) d o not provide a good guide to short-run movements in the money supply.
C) p rovide a poor guide of monetary policy because they are usually underestimates of the revised
statistics.
D) p rovide a good guide of monetary policy, though they are usually underestimates of the revised
statistics.
Answer:
Ques Status: Previous Edition
3) T he Fed revises its estimates of the monetary aggregates, sometimes by large amounts, because
A) l arge depository institutions need only report their deposits infrequently.
B) w eekly monetary data need to be adjusted for the "weekend effect."
C) m onthly monetary data need to be adjusted for the "payday effect."
D) s easonal adjustments become more precise only as more data becomes available.
Answer:
Ques Status: Revised
4) T he Fed estimates initial monetary aggregate reports because ________ depository institutions report the
amount of their deposits infrequently.
A) a ll
B) s mall
C) l arge
D) s tate
Answer:
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5) T he increase in holiday spending is not the same every year causing the Fed's adjustment for ________ to be
revised as more data becomes available.
A) s easonal variation
B) r eporting discrepancy
C) m arket churning
D) t ransactions discrepancy
Answer:
Ques Status: New
6) W hich of the following statements accurately describes the two measures of the money supply?
A) T he two measures do not move together, so they cannot be used interchangeably by policymakers.
B) T he two measures' movements closely parallel each other, even on a month-to-month basis.
C) S hort-run movements in the money supply are extremely reliable.
D) M2 is the narrowest measure the Fed reports.
Answer:
Ques Status: Revised