What Is Money (Meaning of Money)

What Is Money? Meaning of Money 1) To an economist, ________ is anything that is generally accepted in payment for goods and services or in the repayment of debt. money 3) Currency includes paper money and coins. 1) Of money's three functions, the one that distinguishes $ from other assets is its function as a medium of exchange. 2) If peanuts serve as a medium of exchange, a unit of account, and a store of value, then peanuts are C) money. 3) ________ are the time and resources spent trying to exchange goods and services. B) Transaction costs. 4) Even economists have no single, precise definition of money because the "moneyness" or liquidity of an asset is a matter of degree. 4) Compared to an economy that uses a medium of exchange, in a barter economy A) transaction costs are higher. 5) The total collection of pieces of property that serve to store value is a person's wealth. 5) When compared to exchange systems that rely on money, disadvantages of the barter system include: the requirement of a double coincidence of wants. 6) A person's house is part of her wealth. 6) The conversion of a barter economy to one that uses money increases efficiency by reducing transactions costs. 7) ________ is used to make purchases while ________ is the total collection of pieces of property that serve to store value. D) Money; wealth 8) ________ is a flow of earnings per unit of time. A) Income 9) An individual's annual salary is her B) income. 10) When we say that money is a stock variable, we mean that A) the quantity of money is measured at a given point in time. 11) The difference between money and income is that B) money is a stock and income is a flow. 12) Which of the following is a true statement? C) Income is a flow variable. 13) Which of the following statements uses the economists' definition of money? C) I hope that I have enough money to buy my lunch today. 3.2 Functions of Money 7) Which of the following statements best explains how the use of money in an economy increases economic efficiency? Money increases economic efficiency because it decreases transactions costs. 8) When economists say that money promotes ________, they mean that money encourages specialization and the division of labor. C) efficiency 9) Money ________ transaction costs, allowing people to specialize in what they do best. A) reduces 10) For a commodity to function effectively as money it must be easily standardized, making it easy to ascertain its value. 11) All of the following are necessary criteria for a commodity to function as money except A) it must deteriorate quickly. 12) Whatever a society uses as money, the distinguishing characteristic is that it must B) be generally acceptable as payment for goods and services or in the repayment of debt. B) Liquidity 13) All but the most primitive societies use money as a medium of exchange, implying that A) the use of money is economically efficient. 14) Kevin purchasing concert tickets with his debit card is an example of the ________ function of money. A) medium of exchange 15) When money prices are used to facilitate comparisons of value, money is said to function as a A) unit of account. 16) A problem with barter exchange when there are many goods is that in a barter system B) there exists a multiple number of prices for each good. 17) In a barter economy the number of prices in an economy with N goods is [N(N - 1)]/2. 18) If 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. D) 45 19) If there are four goods in a barter economy, then one needs to know ________ prices in order to exchange one good for another. B) 6 20) Because it is a unit of account, money B) reduces the number of prices that need to be calculated. 21) Dennis notices that jackets are on sale for $99. In this case money is functioning as a B) unit of account 22) As a store of value, money D) is a way of saving for future purchases. 23) Patrick places his pocket change into his savings bank on his desk each evening. By his actions, Patrick indicates that he believes that money is a C) store of value. 24) ________ is the relative ease and speed with which an asset can be converted into a medium of exchange. 25) Increasing transactions costs of selling an asset make the asset C) less liquid. 26) Since it does not have to be converted into anything else to make purchases, ________ is the most liquid asset. A) money 27) Of the following assets, the least liquid is D) a house. (bc cant be converted) 28) Ranking assets from most liquid to least liquid, the correct order is B) currency; savings bonds; house. 29) People 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) extremely liquid. 30) If the price level doubles, the value of money D) falls by 50 percent. 31) A fall in the level of prices C) increases the value of money. 32) A hyperinflation is A) a period of extreme inflation generally greater than 50% per month. 33) During hyperinflations, B) money no longer functions as a good store of value and people may resort to barter transactions on a much larger scale. 34) Because inflation in Germany after World War I sometimes exceeded 1,000 % per month, one can conclude that the German economy suffered from C) hyperinflation. 35) 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 D) hyperinflation. 36) Explain how cigarettes could be called "money" in prisoner-of-war camps of World War II. Answer: The cigarettes performed the three functions of money. They served as the medium of exchange because individuals did exchange items for cigarettes. They served as a unit of account because prices were quoted in terms of the number of cigarettes required for the exchange. They served as a store of value because an individual would be willing to save their cigarettes even if they did not smoke because they believed that they could exchange the cigarettes for something that they did want at some time in the future. 3.3 Evolution of the Payments System 1) The payments system is A) the method of conducting transactions in the economy. 2) As the payments system evolves from barter to a monetary system, A) commodity money is likely to precede the use of paper currency. 3) A disadvantage of ________ is that it is very heavy and hard to transport from one place to another. A) commodity money 4) Paper currency that has been declared legal tender but is not convertible into coins or precious metals is called ________ money. B) fiat 5) When paper currency is decreed by governments as legal tender, legally it must be ________. C) accepted as payment for debts 6) 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 C) precious metals were difficult to carry and transport. 7) Compared to checks, paper currency and coins have the major drawbacks that they A) are easily stolen. 8) Introduction of checks into the payments system reduced the costs of exchanging goods and services. Another advantage of checks is that A) they provide convenient receipts for purchases. 9) 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 C) innovations that reduced the costs of exchanging goods and services. 10) Compared to an electronic payments system, a payments system based on checks has the major drawback that B) checks take longer to process, meaning that it may take several days before the depositor can get her cash. 11) Which of the following sequences accurately describes the evolution of the payments system? A) Barter, coins made of precious metals, paper currency, checks, electronic funds transfers 12) During the past two decades an important characteristic of the modern payments system has been the rapidly increasing use of B) electronic fund transfers. 13) Which of the following is not a form of e-money? B) a credit card 14) A smart card is the equivalent of A) cash. 15) An electronic payments system has not completely replaced the paper payments system because of all of the following reasons except D) transportation costs. 16) In explaining the evolution of money C) new forms of money evolve to lower transaction costs. 17) What factors have slowed down the movement to a system where all payments are made electronically? Answer: The equipment necessary to set up the system is expensive, security of the information, and privacy concerns are issues that need to be addressed before an electronic payments system will be widely accepted. 3.4 Measuring Money 1) Recent financial innovation makes the Federal Reserve's job of conducting monetary policy D) more difficult, since the Fed no longer knows what to consider money. 2) Defining money becomes ________ difficult as the pace of financial innovation ________. B) more; quickens 3) Monetary aggregates are measures of: the money supply reported by the Federal Reserve. C) M1 stays the same and M2 stays the same. 4) ________ is the narrowest monetary aggregate that the Fed reports. B) M1 5) The currency component includes paper money and coins held in ________. C) the hands of the nonbank public 6) The components of the U.S. M1 money supply are demand and checkable deposits plus C) currency plus travelers checks. 7) The M1 measure of money includes B) traveler's checks. 8) Which of the following is not included in the measure of M1? D) Savings deposits. 9) Which of the following is not included in the M1 measure of money but is included in the M2 measure of money? D) Small-denomination time deposits 10) Which of the following is included in both M1 and M2? Currency 11) Which of the following is not included in the monetary aggregate M2? B) Savings bonds 12) Which of the following is included in M2 but not in M1? Money market mutual fund shares (retail) 13) Of the following, the largest is M2. 14) If an individual redeems a U.S. savings bond for currency B) M1 increases and M2 increases. 15) If an individual moves money from a smalldenomination time deposit to a demand deposit account, A) M1 increases and M2 stays the same. 16) If an individual moves money from a demand deposit account to a money market deposit account, A) M1 decreases and M2 stays the same. 17) If an individual moves money from a savings deposit account to a money market deposit account, 18) If an individual moves money from currency to a demand deposit account, C) M1 stays the same and M2 stays the same. 19) If an individual moves money from a money market deposit account to currency, A) M1 increases and M2 stays the same. 20) Small-denomination time deposits refer to certificates of deposit with a denomination of less than ________. C) $100,000 21) Which of the following statements accurately describes the two measures of the money supply? A) The two measures do not move together, so they cannot be used interchangeably by policymakers. 22) The decade during which the growth rates of monetary aggregates diverged the most is D) the 1990s. 23) Why are most of the U.S. dollars held outside of the United States? Answer: Concern about high inflation eroding the value of their own currency causes many people in foreign countries to hold U.S. dollars as a hedge against inflation risk. 3.5 How Reliable are the Money Data? 1) The Fed revises its estimates of the monetary aggregates, sometimes by large amounts, because D) seasonal adjustments become more precise only as more data becomes available. 2) The Fed estimates initial monetary aggregate reports because ________ depository institutions report the amount of their deposits infrequently. B) small 3) The 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) seasonal variation 4) An examination of revised money supply statistics, when compared to the initial statistics, suggests that the initial statistics B) do not provide a good guide to short-run movements in the money supply. 5) Generally, the initial money supply data reported by the Fed A) is not a reliable guide to the short-run behavior of the money supply. 6) The initial money supply data reported by the Fed are not a reliable guide to short-run movements in the money supply such as a ________, but are reasonably reliable for longer periods such as a ________. A) month; year