Money banking and financial markets 5th edition cecchetti test bank

Money Banking and Financial Markets 5th Edition Cecchetti TEST BANK Full download: http://testbanklive.com/download/money-banking-and-financial-markets-5thedition-cecchetti-test-bank/ Money Banking and Financial Markets 5th Edition Cecchetti SOLUTIONS MANUAL Full download: http://testbanklive.com/download/money-banking-and-financial-markets-5thedition-cecchetti-solutions-manual/ Chapter02 Moneyand thePaymentsSystem

Multiple-ChoiceQuestions 1. Whichof thefollowingwouldnotbeconsideredacharacteristicof money? a.Itisastoreof value. b. It isameansof payment. c.Itmusthaveintrinsicvalue. d. It isaunitof account.

Ans:C Difficulty: 01 Easy Learning Objective: 02-01 AACSB:Reflective Thinking Blooms: Remember Topic: Money and How We Use It

2. A societywithoutanymoney: a.couldneverexchangegoods and/orservices. b. wouldfindpeopledoingeverythingfor themselves. c.wouldhavetorelyon barter. d. wouldbemoreefficientsincepeoplewouldbemoreself-sufficient.

Ans:C Difficulty: 02 Medium Learning Objective: 02-01 AACSB:ReflectiveThinking Blooms: Understand Topic: Money and How We Use It

3. Theuse of moneymakes us moreefficientbecause: a.wespendmoretime tradingandmoretimeproducing.

b. peoplecanspecializeinwhattheydo well. c.withmoneyweborrow less. d. moneyincreasesinvalueovertime.

Ans:B Difficulty: 02 Medium Learning Objective: 02-01 AACSB:ReflectiveThinking Blooms: Understand Topic: Money and How We Use It

4. Theunitof accountcharacteristicof money: a.makesitdifficulttocomparetherelativepricesof goods andservices. b. referstohow weusemoneyto transferpurchasingpowerovertime. c.meanspricesareexpressedin terms of money. d. meansthat moneyfinalizespayments.

Ans:C Difficulty: 02 Medium Learning Objective: 02-01 AACSB:ReflectiveThinking Blooms: Understand Topic: Money and How We Use It

5. Withouttheuseof money,workersinaneconomy would: a.becomemorespecialized b. havetospend a lotlesstime trading c.probablyspecializeless d. befarmoreproductive Ans:C Difficulty: 02 Medium Learning Objective: 02-01 AACSB:ReflectiveThinking Blooms: Understand Topic: Money and How We Use It

6. As aneconomyproducesmoredifferenttypesof goods: a.itismoredifficulttoquotepricesif theeconomydoesnot use money. b. thenumberof relativepricesdecreases. c.moneybecomeslessusefulasaunitof account. d. moneybecomeslessusefulasastandardof value.

Ans:A Difficulty: 03 Hard Learning Objective: 02-01 AACSB:Analytical Thinking Blooms: Evaluate

Topic: Money and How We Use It

7. Thestoreof valuecharacteristicof moneyrefersto thefactthat: a.peoplesavemostof theirmoney. b. money allows people to shift purchasing power into the future. c.moneyisnotvaluableunlessit isstored. d. moneyis theonlywaypeoplehavetostorevalue.

Ans:B Difficulty: 01 Easy Learning Objective: 02-01 AACSB:Reflective Thinking Blooms: Remember Topic: Money and How We Use It

8. Whichbestdescribesmoneyasa meansof payment? a.Moneyprovidesan immediatedoublecoincidenceof wants. b. Money makessureadoublecoincidenceof wantsneveroccurs. c.Moneyrequiresat leasttwo transactionstoobtainthedoublecoincidenceof wants. d.

Toobtaina doublecoincidenceof wantswithoutmoneyisimpossible.

Ans:A Difficulty: 01 Easy Learning Objective: 02-01 AACSB:Reflective Thinking Blooms: Understand Topic: Money and How We Use It

9. Comparetwoeconomies:abartereconomyversusaneconomythatusesmoney.In orderto exchangegoods andservices: a.adoublecoincidenceof wantsisnecessaryinthebartereconomy. b. a doublecoincidenceof wantsismorelikelytooccurin thebartereconomy. c.transactionsarelikelytobesmootherin thebartereconomybecausegoods andservicesare exchangeddirectly. d. themoneyeconomyrequiresthatsellershavemoreinformationaboutbuyers'wants.

Ans:A Difficulty: 02 Medium Learning Objective: 02-01 AACSB:ReflectiveThinking Blooms: Understand Topic: Money and How We Use It

10. In a bartersystem people: a.havetospecializeinordertohavegoods totrade. b. cannotspecializebecausetheyneverknow whatgoods willbedesired.

c.arelesslikelytospecializeasextensivelyas theywouldina monetaryeconomy. d. mustbeself-sufficient.

Ans:C Difficulty: 02 Medium Learning Objective: 02-01 AACSB:ReflectiveThinking Blooms: Understand Topic: Money and How We Use It

11. How manypriceswoulda traderof aparticulargood needtoknow inabartereconomywith 5 goods? a.5 b.

10 c.20 d. 50 Ans:B Difficulty: 03 Hard Learning Objective: 02-01 AACSB:Knowledge Application Blooms: Apply Topic: Money and How We Use It

12. How manypriceswoulda traderof aparticulargood needtoknow inabartereconomywith 20 goods? a.190 b. 100 c.20 d.

40 Ans:A Difficulty: 03 Hard Learning Objective: 02-01 AACSB:Knowledge Application Blooms: Apply Topic: Money and How We Use It

13. In a bartereconomywith"n'' numberof goods therewillalwaysbe: a.exactly"n'' relativeprices. b. fewerthan"n'' relativeprices.c.morethan"n'' relativeprices.d. "n''/2relativeprices.

Ans:C Difficulty: 03 Hard Learning Objective: 02-01

AACSB:Knowledge Application Blooms: Apply Topic: Money and How We Use It

14. Thehightransactioncostsassociatedwithabartersystemrefersto the: a.factthat,oftentimes, theseexchangesaretaxedbygovernments. b. riskassociatedwithhavingtocarryan inventoryof goods totrade. c.high costassociatedwithfindingsomeonewithwhomtoexchange. d. costof drawingup completecontracts.

Ans:C Difficulty: 02 Medium Learning Objective: 02-01 AACSB:ReflectiveThinking Blooms: Understand Topic: Money and How We Use It

15.

Suppose thatinabartereconomyTombakesbreadandHansproduceschocolates.Tom wantschocolatesbutHansdoesn'tlikebread,so Hans isunwilling to tradewithTom.Tom's problemisanexampleof whichproblemassociatedwitha bartersystem? a.Toomuch specialization b. Notenoughprices c.Thelaw of diminishingreturns d. Thedoublecoincidenceof wantsproblem Ans:D Difficulty: 02 Medium Learning Objective: 02-01 AACSB:Reflective Thinking Blooms: Understand Topic: Money and How We Use It

16. Specializationusuallyincreasestheoutputof a country;howevereffectivespecialization requires: a.everyonein thecountryproducingthesame thing. b. thatworkershaveverysimilar skills. c.an effectivelow-costmeanstoexchangegoods andservices. d. a largestockof capital.

Ans:C Difficulty: 02 Medium Learning Objective: 02-01 AACSB:ReflectiveThinking

Blooms: Understand Topic: Money and How We Use It

17. Whichof thefollowingisnotanexampleof bartering? a.SuetradingcandleswithTomfor hisbread. b. Marypayingfor hernewshoeswithhercreditcard. c.John cutting hisneighbor'sgrassinreturnfor hisneighborwashing John's car. d. Mrs. Smith treating theneighborchildrentopizzaaftertheyhelpedcleanup heryard.

Ans:B Difficulty: 01 Easy Learning Objective: 02-01 AACSB:ReflectiveThinking Blooms: Understand Topic: Money and How We Use It

18. Moneyeliminatestheneedfor: a.asearchfor adoublecoincidenceof wants.b. governmentregulation. c.specializationof labor. d. financialIntermediaries.

Ans:A Difficulty: 01 Easy Learning Objective: 02-01 AACSB:ReflectiveThinking Blooms: Remember Topic: Money and How We Use It

19. Moneyasameansof paymentrefersto: a.only actualcurrency. b. only coinsandcurrency. c. only coins,currencyandcreditcards. d. anythingthatisgenerallyaccepted aspaymentfor goods andservices.

Ans:D Difficulty: 01 Easy Learning Objective: 02-01 AACSB:ReflectiveThinking Blooms: Remember Topic: Money and How We Use It

20. Whilemoneyisanassetnotallassetsaremoneybecause: a.onlymoneystoresvalue. b. moneyworks asa meansof payment. c.onlymoneyisa good assettoholdduringtimesof inflation.d. moneymust belegaltender.

Ans:B Difficulty: 02 Medium Learning Objective: 02-01

AACSB:ReflectiveThinking Blooms: Understand Topic: Money and How We Use It

21. An advantagethat moneyhasoverotherassetsis thatit: a.increasesinvalueover time. b. has lowertransactioncoststouse asameansof paymentthanotherassets.c.providesahigherreturntotheowner. d. isasaferassettoholdduringtimesof inflation.

Ans:B Difficulty: 01 Easy Learning Objective: 02-01 AACSB:ReflectiveThinking Blooms: Remember Topic: Money and How We Use It

22. An individualwho storeswealth inartratherthan moneywillfind thathe/she: a.sufferslargerreallossesduringperiodsof high inflation.b. hasfarmoreliquiditythanmostsavers. c.willincurhighertransactioncostswhenhe/sheultimatelymakespurchases.d. willhavetoresorttobarterexchangingtheartfor desiredgoods.

Ans:C Difficulty: 02 Medium Learning Objective: 02-01 AACSB:ReflectiveThinking Blooms: Understand Topic: Money and How We Use It

23. Whichof thefollowingstatementsismostcorrect? a.Moneyiswealthbutnotallwealth ismoney. b. Moneyisa meansof paymentbutisnotpartof wealth. c.In ordertobeconsideredpartof aperson'swealth,anassetmusthaveapositivereturn. d.

Wealthisastoreof valueand ameansof payment.

Ans:A Difficulty: 02 Medium Learning Objective: 02-01 AACSB:ReflectiveThinking Blooms: Understand Topic: Money and How We Use It

24. Whichof thefollowingis incorrect? a.Moneyiswealthbutnotallwealth ismoney. b. Moneyisa meansof paymentbutisnotpartof wealth.

c.An assetdoesn'thavetobeameansof paymenttobeapartof aperson'swealth. d. All items consideredwealthcan eventuallybeconvertedtoameansof payment.Ans:B Difficulty: 02 Medium Learning Objective: 02-01 AACSB:ReflectiveThinking Blooms: Understand Topic: Money and How We Use It

25. Whichof thefollowingstatementsisnottrue? a.For mostof historygoldhasbeen themostcommoncommoditymoney. b. The mostcommonformof moneyin theU.S. isnotacommoditymoney. c.Gold isanexampleof a fiatmoney. d. U.S. currencyis legaltender.

Ans:C Difficulty: 02 Medium Learning Objective: 02-02 AACSB:ReflectiveThinking Blooms: Understand Topic: The Payments System

26. Goldwouldbea superiorcommoditymoneycomparedtowheatbecause: a.wheathasahighvaluerelativetoweight,whichgolddoesnot.b. it iseasiertodividewheatintosmallunits. c.wheathasmorepracticaluses thangold. d. wheatisperishable.

Ans:D Difficulty: 03 Hard Learning Objective: 02-02 AACSB:Analytical Thinking Blooms: Evaluate Topic: The Payments System

27. ThefactthatU.S. currencyis legaltender means: a.U.S. currencyisgood anywhereintheworld. b. theonly moneythegovernmentwillacceptfor settlementof debtsis U.S. currency. c.privatebusinessesintheU.S. and theU.S. governmentmustacceptcurrencyfor payment. d. it cannotbebackedbygoldor othermetals.

Ans:C Difficulty: 01 Easy Learning Objective: 02-02 AACSB:ReflectiveThinking Blooms: Remember Topic: The Payments System

28. In comparingmoneytoa U.S. Treasurybond heldbyan individual,wecansay: a.thetreasurybond isanassetbutmoneyisnot. b. moneyisanassetbuttheU.S. bond isa liabilityof theindividual.c.botharestoresof value. d. moneyisastoreof valuebutthebond isnot.

Ans:C Difficulty: 02 Medium Learning Objective: 02-02 AACSB:Reflective Thinking Blooms: Understand Topic: The Payments System

29. In comparingmoneytoa U.S. Treasurybond heldbyan individual,wecansay: a.botharelegaltender. b. bothareunitsof account. c.onlythebond is legaltendersinceit isanobligationof theU.S. government.d. botharestoresof value.

Ans:D Difficulty: 02 Medium Learning Objective: 02-02 AACSB:Reflective Thinking Blooms: Understand Topic: The Payments System

30. In comparingmoneytoa shareof Microsoftstockheldby an individual,wecansay: a.theshareof stock isanasset,butmoneyisa liability. b. onlythemoneyisa meansof payment,butbotharestoresof value. c.onlythe moneyisameansof payment,butbothareunitsof account.d. boththeMicrosoftstockand themoneyareliabilities.

Ans:B Difficulty: 02 Medium Learning Objective: 02-02 AACSB:Reflective Thinking Blooms: Understand Topic: The Payments System

31. Comparingchecksandcurrency,wecansay: a.botharemoneybutonlycurrencyis legaltender.b. onlychecksarebothmoneyand legaltender. c.acheckisn'tmoneybutcurrencyis.d. bothare moneyand legaltender.Ans:C Difficulty: 02 Medium Learning Objective: 02-02

AACSB:ReflectiveThinking Blooms: Understand Topic: The Payments System

32. WhentheContinentalCongressissuedcurrencytofinancetheRevolutionaryWar,the ContinentalCongress: a.issuedtoomany"continentals," eventually making thecurrency worthless. b. tied thevalueof the"continental"togold. c.tiedthevalueof the"continental"togoldtoFrench"assignats." d. made"continentals"legaltender.

Ans:A Difficulty: 01 Easy Learning Objective: 02-02 AACSB:ReflectiveThinking Blooms: Remember Topic: The Payments System

33. DuringtheCivilWar,theNorthissuedcurrency,known as"greenbacks".Whichof the followingis trueof "greenbacks"? a.Greenbacksarestilllegaltenderin theU.S. b. Greenbacksweretied to thevalueof goldandsilver. c.TheSouthused"greenbacks"topayfor salariesandsupplies. d.

Greenbacksareahistoricalexampleof commoditymoney.Ans:A Difficulty: 03 Hard Learning Objective: 02-02 AACSB:Analytical Thinking Blooms: Analyze Topic: The Payments System 34. Mostof thenon-cashretailpaymentsmadeeachyearin theUnitedStatesaremadeby: a.check. b. creditcard. c.debitcard. d. electronicfunds transfers.

Ans:D Difficulty: 01 Easy Learning Objective: 02-02 AACSB:ReflectiveThinking Blooms: Remember Topic: The Payments System 35. All of thefollowingaretrueaboutelectronicfunds transfersexcept: a.sometimesinvolvetheFederalReservesendingelectronicimagesof checkstobanks. b. occurwhenbanksor individualsdeposit/withdrawfromonebank accounttoanother electronically. c.includeautomatedclearinghousetransactions(ACH).

d. includecreditcard paymentsmadeonline.

Ans:A Difficulty: 02 Medium Learning Objective: 02-02 AACSB:ReflectiveThinking Blooms: Remember Topic: The Payments System 36. Carlospays hiscablebill usinghisbank'sinternetbankingwebsite towithdrawfunds from hischeckingaccount.This transactionisa(n): a.automatedclearinghousetransaction (ACH). b. digitized-checktransaction. c.e-moneytransaction. d. Fedwiretransaction.

Ans:A Difficulty: 02 Medium Learning Objective: 02-02 AACSB:ReflectiveThinking Blooms: Remember Topic: The Payments System 37. As aresultof "Check21—TheCheckClearingfor the21st CenturyAct�: a.banksno longerhavetoshippapercheckstocompletetheprocessof checkclearing. b. peoplecanwritechecksandplanon havingacoupleof daystomakeadeposittocoverthe checkamount. c.canceledcheckscanno longerbeusedasproof of payment. d. theFederalReserveisno longerinvolvedin thecheck-clearingprocess.

Ans:A Difficulty: 01 Easy Learning Objective: 02-02 AACSB:ReflectiveThinking Blooms: Remember Topic: The Payments System

38. Thevalueof fiatmoney: a.comesfromitsintrinsicvalue. b. is worth moreasa commoditythan itsvalueasmoney.c.comesfromgovernmentdecree. d. meansthatit ismoredesirablethancurrency.

Ans:C Difficulty: 01 Easy Learning Objective: 02-02 AACSB:ReflectiveThinking Blooms: Remember Topic: The Payments System

39. Whichof thefollowingcouldnotbecommoditymoney? a.Gold coins b.

Cigarettes c.U.S. Currency d.

Silk Ans:C Difficulty: 02 Medium Learning Objective: 02-02 AACSB:ReflectiveThinking Blooms: Understand Topic: The Payments System

40. U.S. currencyis a.acommoditymoney b. fiatmoney c.tiedto thevalueof goldata fixedrate d. theonlystoreof value Ans:B Difficulty: 02 Medium Learning Objective: 02-02 AACSB:ReflectiveThinking Blooms: Understand Topic: The Payments System 41. Onemajordifferencebetweena debitcard andacreditcardis: a.onlythedebitcard helpsyoutobuildacredithistory.b. thedebitcardhaslowerminimummonthlypayments. c.you do notneedtoactuallyhavethefunds inyouraccountwhenyouusea debitcard.d. debitcardshaveno latefees.

Ans:D Difficulty: 02 Medium Learning Objective: 02-02 AACSB:ReflectiveThinking Blooms: Understand Topic: The Payments System

42. Onemajordifferencebetweena debitandcreditcardis: a.you can buildacredithistorywiththecreditcard butnotwith thedebitcard.b. you havetopayintereston yourpurchasesifyouuse acreditcard. c.creditcardsare moneyand thedebitcardisnot.d. debitcardschargelatefees.

Ans:A Difficulty: 02 Medium Learning Objective: 02-02

AACSB:ReflectiveThinking Blooms: Understand Topic: The Payments System

43. Tosayanassetis liquidimpliesthat: a.wearefocusingon acategoryof assetsthatareinaphysicallyliquidform, likeoil.b. weareconsideringassetsthat maybereadilyconvertedintoameansof payment. c.weareconsideringanyassetthatcanbe sold.d. weareonlyconsideringU.S. currency.

Ans:B Difficulty: 02 Medium Learning Objective: 02-02 AACSB:ReflectiveThinking Blooms: Understand Topic: The Payments System 44. Oneadvantageof usingchecksoveradebitcard is: a.checkscanbereplacedif lost or stolen,a debitcard cannot. b. thebankisresponsibleifsomeonestealsyourchecksanduses them;this isn't thecasewith debitcards. c.acancelledpapercheckis theonlygenerallyacceptedproof of payment. d. thepersonhas"float,"meaningtimebetweenwriting thecheckanddepositingfunds tocover it.

Ans:D Difficulty: 02 Medium Learning Objective: 02-02 AACSB:ReflectiveThinking Blooms: Understand Topic: The Payments System

45. Checksandcurrencyfunctionsimilarly, however: a.currencyisa moreeffectivemeansof payment. b. carryingcurrencyentailsgreaterrisk,becauseitcannotbereplacedif lostor stolen. c.currencyisa betterstoreof valuethancheckingdeposits. d. checksarenotincludedinmeasuresof money,whereascurrencyis.

Ans:B Difficulty: 02 Medium Learning Objective: 02-02 AACSB:ReflectiveThinking Blooms: Understand Topic: The Payments System 46. Moneyaggregatescan bestbedefinedasasetof measuresof theamountof: a.moneythatexistsata particularpointin time.

b. moneytheFederalReservehason deposit asreserves. c.moneyavailableto theeconomyoverayear. d. U.S. currencytheBureauof PrintingandEngravinghasproduced.

Ans:A Difficulty: 01 Easy Learning Objective: 02-03 AACSB:ReflectiveThinking Blooms: Remember Topic: Measuring Money 47. The moneyaggregateM1 includeseachof thefollowing,except: a.currencyinthehandsof thepublic. b. travelerschecksthathavebeen issued. c.currencyinthevaultsof commercialbanks. d. demand depositsatcommercialbanks.

Ans:C Difficulty: 01 Easy Learning Objective: 02-03 AACSB:ReflectiveThinking Blooms: Remember Topic: Measuring Money 48. Theamountof currencyinthehandsof thepublicisapproximatelywhatpercentageof M1? a.45% b. 25% c. 30% d. 90% Ans:A Difficulty: 01 Easy Learning Objective: 02-03 AACSB:ReflectiveThinking Blooms: Remember Topic: Measuring Money 49. The moneyaggregateM2 includes: a.largedenominationtimedeposits. b. stockandbond mutualfund shares. c.savingsdepositsbutnotmoneymarketdepositaccounts. d. M1.

Ans:D Difficulty: 01 Easy Learning Objective: 02-03 AACSB:ReflectiveThinking Blooms: Remember Topic: Measuring Money

50. The mostcommonlyquoted monetaryaggregateis: a.money-marketmutualfund shares. b. M1 sinceit is themostliquid. c.publiccurrency. d. M2 sinceitsmovementismost closelyrelated to interestratesandeconomicgrowth.

Ans:D Difficulty: 01 Easy Learning Objective: 02-03 AACSB:ReflectiveThinking Blooms: Remember Topic: Measuring Money 51. An automobileisanasset,butitisnotliquidbecause: a.thetransactionscostsfor turning it into moneyarehigh. b. theowner maystillbemakingpaymentson theloan. c.theautomobilemaynotbeingood repair. d. theautomobilecannotbe sold withouta loss invalue.

Ans:A Difficulty: 02 Medium Learning Objective: 02-03 AACSB:ReflectiveThinking Blooms: Understand Topic: Measuring Money 52. Whichof thefollowinglists correctlyordersassetsfrommostliquidtoleastliquid? a.Stocks, house, papercurrency, savingsdeposits b. Stocks, papercurrency, house, savingsdeposits c.Savingsdeposits, papercurrency, house, stocks d. Papercurrency, savingsdeposits, stocks, house Ans:D Difficulty: 02 Medium Learning Objective: 02-03 AACSB:Analytical Thinking Blooms:Evaluate Topic: Measuring Money 53. Whichof thefollowingassetsis themostliquid? a.Art b. Demand deposits c.Houses d. Stocks Ans:B Difficulty: 01 Easy Learning Objective: 02-03 AACSB:ReflectiveThinking Blooms: Remember

Topic: Measuring Money 54. Which of thefollowingassetsis leastliquid? a.Commonstock b. Houses c. Art d. Checkingaccountdeposits.

Ans:C Difficulty: 01 Easy Learning Objective: 02-01 AACSB: Reflective Thinking Blooms: Remember Topic: Measuring Money 55. Consideringtheroughly$1.35 trillioninU.S. currencyheldbythepublic: a.over 90% of theamountisheld in theformof $1 bills. b. more than three-fourths isheldintheformof $100 bills. c.over halfof thecurrencyheldintheformof $20 bills. d. theFederalReservedistributestheamountequallyacrossalldenominationsof bills.

Ans:B Difficulty: 02 Medium Learning Objective: 02-03 AACSB:ReflectiveThinking Blooms: Remember Topic: Measuring Money

56. Avabuysa$2,000 computerusinga papercheck.Atwhichstepdoes$2,000 getrecordedinM1? a.WhenAvahandsthe$2,000 checktothecomputermerchant. b. Oncethe$2,000 iscreditedtothe merchantbank'sreserveaccountand isdebitedfromAva'sbank account. c.OncetheFederalReservesends thepapercheck(or anelectronicimage)toAva'sbank. d. ThecheckisneverM1. The$2,000 isM1 bothinAva'sbankaccountand, later,in the merchant'saccount.Itis thedepositbalancethatiscounted.

Ans:D Difficulty: 03 Hard Learning Objective: 02-03 AACSB:Analytical Thinking Blooms:Analyze Topic: Measuring Money 57. Sophiareceivesa$400 giftcardfor hercampusbookstorefromher parents.Whichof the followingis trueregardingthe$400 giftcard? a.ItiscountedonlyinM1. b. It is includedinbothM1 andM2.

c.ItiscountedinonlyM2. d. Stored-valuecards arenotcountedineitherM1 or M2.

Ans:D Difficulty: 02 Medium Learning Objective: 02-03 AACSB:ReflectiveThinking Blooms: Understand Topic: Measuring Money 58. Gross DomesticProductintheU.S. isroughly: a.equaltoM1. b. twiceas largeas M2. c.equaltoM2. d. more than six timesM1.

Ans:D Difficulty: 01 Easy Learning Objective: 02-03 AACSB:ReflectiveThinking Blooms: Remember Topic: Measuring Money 59. M1 is: a.about 17% of GDP. b. equaltoGDP. c.aboutfour timeslargerthanGDP. d. aboutonefourththeamountof GDP.Ans:A Difficulty: 01 Easy Learning Objective: 02-03 AACSB:ReflectiveThinking Blooms: Remember Topic: Measuring Money 60. M1 is: a.amoreusefulmeasureof therelationshipbetweenthe moneysupplyand inflationbecauseit includesthemostliquidassets. b. the moneysupplytheFederalReservepaysthemostattentionto inconductingmonetary policy. c.lessusefulthan M2 for understandinginflation. d. thefastestgrowingof allof themoneyaggregates.

Ans:C Difficulty: 02 Medium Learning Objective: 02-03 AACSB:Reflective Thinking Blooms: Remember Topic: Measuring Money 61. M1 hasdecreasedin itsusefulnessinunderstandinginflationdueto:

a.theincreaseduseof checksin theeconomy. b. theintroductionof money marketmutualfund sharesandsimilarcheckingsubstitutes. c.morerelianceon theuseof currency. d. theincreaseduse of electronicpayments.

Ans:B Difficulty: 02 Medium Learning Objective: 02-03 AACSB:ReflectiveThinking Blooms: Remember Topic: Measuring Money 62. Theintroductionof money marketsubstitutesfor basiccheckingaccountswasfueled partiallyby the: a.relativelyhigh ratesof inflationthatexistedin thelate 1970s andearly1980s. b. reluctanceof manyretailerstoacceptchecks. c.high numberof bankfailuresthatwereoccurringinthe1970s. d.higherinterestratesbankshadtopayon checkingaccounts.

Ans:A Difficulty: 02 Medium Learning Objective: 02-03 AACSB:ReflectiveThinking Blooms: Remember Topic: Money and How We Use It 63. A cross-countryanalysisof moneygrowthsupportstheconclusionthat: a.thereisno correlationbetweenthegrowthrateof thequantityof moneyand therateof inflation. b. thecorrelationbetweenthemoneygrowthrateandinflationinmost countrieswaspositive butverysmall. c.thecorrelationbetweeninflationandmoneygrowth inmostindustrializedcountrieswas actuallynegative. d. thecorrelationbetweeninflationand themoneygrowthratewaspositiveandrelatively strong.

Ans:D Difficulty: 02 Medium Learning Objective: 02-03 AACSB:ReflectiveThinking Blooms: Understand Topic: Measuring Money 64. A cross-countryanalysisof moneygrowthshows that the growth rate in the money supply was: a.lowerincountrieswith lowerinflationrates. b. higherincountrieswithlowerinflationrates. c.lowerincountrieswithhigherinflationrates. d. thesame whetherthecountrieshadhighor lowinflationrates.

Ans:A Difficulty: 02 Medium Learning Objective: 02-03 AACSB:ReflectiveThinking

Blooms: Understand Topic: Measuring Money 65. TheConsumerPriceIndex(CPI) is: a.an exampleof an indexthatusesvariableexpenditureweights. b. a fixed-expenditure-weightindexused tomeasurechangesin theGDP Deflator. c.a fixed-expenditureweight-indexused tomeasurechangesinpurchasingpowerfor households. d. theleastcommonlyusedmeasureof inflation.

Ans:C Difficulty: 01 Easy Learning Objective: 02-03 AACSB:Reflective Thinking Blooms: Remember Topic: Measuring Money 66. TheConsumerPriceIndex(CPI): a.tendstounderstatetheimpactof pricechanges. b. tendstooverstatetheimpactof pricechangesduetosubstitutionbias. c.is moreaccuratethantheGDP deflator. d. assumes thatconsumers substituteawayfromcheapergoods.

Ans:B Difficulty: 02 Medium Learning Objective: 02-03 AACSB:ReflectiveThinking Blooms: Understand Topic: Measuring Money 67. TheConsumerPriceIndex(CPI): a.is calculatedusingabasketof goods andservicesadjustedannuallyby government statisticians. b. answersthequestion,"How muchmoredoesitcost todaytobuy thesamebasketof goods andservicesthatwerepurchasedatsomefixedtimein thepast?" c.doesnotsufferfromsubstitutionbiasbecausethebasketused tomeasurepriceschanges everyyear. d. understatestheimpactof pricechanges.

Ans:B Difficulty: 02 Medium Learning Objective: 02-03 AACSB:ReflectiveThinking Blooms: Understand Topic: Measuring Money 68. Economistsstudythelinkbetween moneyand inflationbecause: a.they want to understand how to keep inflation low and stable. b. economistsbelievethatinflationin the3-6% rangeishealthyfor aneconomy. c.as pricesincreasemoneybecomesmorevaluable. d. theFedneedsto increasethemoneysupplyaspricesincrease.

Ans:A

Difficulty: 02 Medium Learning Objective: 02-03 AACSB:ReflectiveThinking Blooms: Understand Topic: Measuring Money 69. Inflationreferstogrowth in theeconomy’s: a.Gross DomesticProduct(GDP). b. interestrates.c.m oney. d. prices.

Ans:D Difficulty: 01 Easy Learning Objective: 02-03 AACSB:ReflectiveThinking Blooms: Remember Topic: Measuring Money

70. Whenthepricelevelincreases,thepurchasingpowerof money: a.increasesbyasimilaramount. b. staysthesamesincethepurchasingpowerof moneyisnotimpactedby pricelevels.c.decreases. d. firstincreasesand thendecreasesaspeopleget usedtohigherprices.

Ans:C Difficulty: 02 Medium Learning Objective: 02-03 AACSB:Reflective Thinking Blooms:Understand Topic: Measuring Money 71. Thepurchasingpowerof money: a.riseswhen inflationrises. b. decreasesas thepriceleveldecreases.c.decreaseswith inflation. d. is notimpactedbyinflation,onlyby monetarypolicy.

Ans:C Difficulty: 01 Easy Learning Objective: 02-03 AACSB:ReflectiveThinking Blooms: Remember Topic: Measuring Money 72. Whichof thefollowingstatementsis incorrect?

a.If youcanbuythesamegoods thisyearasyouboughtlastyearwithlessmoneytheremust havebeendeflation. b. If youcan buy thesamegoods thisyearasyoupurchasedoneyearagowith thesameamount of money,pricesarestable. c.If purchasingthesamegoods todaythatwerepurchasedoneyearagorequiresmoremoney, theremusthavebeeninflation. d. If youcan buy thesamegoods thisyearasyouboughtlastyearwith thesame moneythere must havebeendeflation.

Ans:D Difficulty: 02 Medium Learning Objective: 02-03 AACSB:Analytical Thinking Blooms:Analyze Topic: Measuring Money

73. Whichof thefollowingstatementsiscorrect? a.If youcanbuythesamegoods thisyearasyouboughtlastyearwithlessmoneytheremust havebeeninflation. b. If purchasingthesamegoods todaythatwerepurchasedoneyearagorequiresmoremoney, theremusthavebeendeflation. c.If purchasingthesamegoods todayasoneyearagorequireslessmoney,the moneysupply likely decreased. d. If purchasingthesamegoods todayasoneyearagorequireslessmoney,themoneysupply likelyincreased.

Ans:C Difficulty: 02 Medium Learning Objective: 02-03 AACSB:Analytical Thinking Blooms:Analyze Topic: Measuring Money 74. TheU.S. Treasuryestimatesthatthefractionof U.S. currencyheldoutsidetheUnitedStates is: a.aboutone-fourth.b. abouthalf. c.betweenone-halfandtwo-thirds. d. lessthan10%.

Ans:C Difficulty: 02 Medium Learning Objective: 02-03 AACSB:Reflective Thinking Blooms: Remember Topic: Measuring Money

75. In countrieswith low inflation: a.M2 growth isa verystrongforecasterof inflation. b. theretendstobeagreaterrelianceon checksthanelectronicpayments. c.M2 growth isa poor forecasterof inflation. d. moneystocksarea largerpercentageof GDP.Ans:C Difficulty: 02 Medium Learning Objective: 02-03 AACSB:ReflectiveThinking Blooms: Understand Topic: Measuring Money

76. Sueusesacreditcard topurchaseanewpairof jeans.Sueis: a.usingmoneytobuyher jeanssincecreditcardsismoney. b. creatinga liabilitythatshewillultimatelyhavetopaywithmoney.c.usinganelectroni cpaymentformof money. d. usingaformof moneyincludedinM2.

Ans:B Difficulty: 02 Medium Learning Objective: 02-03 AACSB:Reflective Thinking Blooms: Understand Topic: Money and How We Use It 77. Thevalueof moneyasameansof payment: a.is independentof changesintheamountof moneyin theeconomy.b. is fixedoncerelativepricesareset. c.dependson theamountof moneyintheeconomy, among other things. d. dependson whetherthe majorityof M1 is incurrencyor demanddeposits.

Ans:C Difficulty: 02 Medium Learning Objective: 02-02 AACSB:ReflectiveThinking Blooms: Understand Topic: The Payments System 78. The primary concern of current critics of fiat money is that: a.fiat money is too costly to produce. b. governments issue too much money threatening its value. c. fiat money is too easy to counterfeit.

d. government will issue too little threatening economic growth.

Ans:B Difficulty: 02 Medium Learning Objective: 02-02 AACSB:ReflectiveThinking Blooms: Remember Topic: The Payments System 79. Current critics of fiat money are urging governments to do what? a. Return to a system of legal tender. b. Move to a system of electronic transactions only. c.Return to a gold standard. d. Place limits on the creation.

Ans:C Difficulty: 02 Medium Learning Objective: 02-02 AACSB:Reflective Thinking Blooms: Remember Topic: The Payments System 80. A policy is time consistent when: a.policymakers have incentives to adhere to a policy decision made today, in the future. b. policymakers have incentives to make policy decisions in a time-sensitive fashion. c.policymakers consider the future when making current policies. d. the timing of a policy is irrelevant.

Ans:A Difficulty: 02 Medium Learning Objective: 02-02 AACSB:Reflective Thinking Blooms: Apply Topic: The Payments System

ShortAnswerQuestions 81. Consider thefollowing:therearetwocountries,A andB.Eachcountryhasthesame resources,andproducesthesamegoods. Theresidentsof countryA use money; theresidentsof countryBrelyon barteringof goods. Willeachcountryproducethesamequantityof output? Explain.

Ans:No, theresidentsof CountryBwilldefinitelyspendmoreof theirtimetransacting,tryingto createadoublecoincidenceof wants,andmayhavetorelyon multipletradestodo so. Theywill also likelyspecializeless,reducingthegainstothecountryfromspecialization.In countryA the residentswillbeableto transactimmediatelyusingmoney,andwillalsobeabletospecializein whattheydo wellcreatingamoreefficienteconomy.

Difficulty: 02 Medium Learning Objective: 02-02 AACSB:Analytical Thinking

Blooms:Analyze Topic: The Payments System 82. Consideran islandwherepeopleusesanddollars(shells)ascurrency. For simplicity, assumethatpeopleconsumeonlyonegood:fish.Currently,thereare400 sanddollarsin circulationandthereare200 fishpurchasedeachyear.Basedon thisinformation,whatis the priceof fish?

Now, suppose thatachangeinclimateleadstonewsanddollarswashingashore,leavinga total of 500 sanddollars.If therearestill200 fishpurchasedeachyear,whatis thenewpriceof fish? In ordertopreventinflation,whatwouldhavetohappento theamountof fishpurchasedeach year?

Ans:Whenthereare400 sanddollarsand200 fishpurchasedinayear,thisimplies thateachfish costs2 sanddollars(=400/200).Whenthenumberof sanddollarsincreasesto500, thepriceof fishwill increaseto2.5 sanddollarsperfish(=500/200).In ordertopreventthis inflationinfish prices,thenumberof fishwouldhavetobeincreasedto250. Thatis, ifthereare500 sand dollarsand250 fish, thepriceof fish wouldgo backto2 sanddollarsperfish(=500/250).

Difficulty: 02 Medium Learning Objective: 02-01 AACSB:Knowledge Application Blooms: Apply Topic: Money and How We Use It 83. Whatdoesit meantosay thatanassetis"liquid"?

Ans:An assetis liquidwhen itcan beconvertedintoameans of payment,quicklywithout sufferinga loss invalue.

Difficulty: 01 Easy Learning Objective: 02-01 AACSB:Reflective Thinking Blooms: Remember Topic: Money and How We Use It 84. Therearethreegoods producedinaneconomyby threeindividuals: Good Producer Oranges Orchard owner Bread Baker Chocolate Candy Maker If theorchardownerlikesonlybread,thebakerlikesonlychocolate,andthecandymaker likes onlyoranges,willany tradebetweenthesethreepersonstakeplaceina bartereconomy? Explain.

Ans:Yes,butthisisagood exampleof thehigh transactioncoststhatcan occurina barter economyduetothedoublecoincidenceof wantsproblem.Anyoneof theindividualswillhave tomaketwo tradestogetwhathe/shewants;for example,thebakerwillhaveto tradebreadwith theorchardownertogetoranges,tothenbeabletotradewith thecandymaker toobtainthe chocolatethathe/shereallywants.

Difficulty: 03 Hard Learning Objective: 02-01 AACSB:Analytical Thinking

Blooms:Analyze Topic: Money and How We Use It 85. ManycollegecampusesusestudentID cardsasa wayfor studentstopayfor on-campus expenses,suchasbooks, photocopies,andfood. For convenience,somestudentswillmaintaina balanceon their ID cards.Arethesebalancesameans of payment?Aretheya storeof value?

Explainwhyor why not.

Ans:Thebalanceson thecardsserveasbothameansof paymentandastoreof value.Using the studentID cardin thisway isanexampleof a stored-valuecard,similartoagiftcardfor astore, or a cardused topayfor publictransportation.Whilethesestoredvaluecardsarenotincludedin themoneysupply, theyare usedasa meansof paymentandastoreof value.

Difficulty: 02 Medium Learning Objective: 02-01 AACSB:Analytical Thinking Blooms:Analyze Topic: Money and How We Use It 86. Explainwhythefollowingstatementis true,"moneyisanassetbutnotallassetsare money."

Ans:Moneyisanassetbecauseit representssomethingof valueto the owner. But not all assets can be used as an immediate means of payment.

Difficulty: 01 Easy Learning Objective: 02-01 AACSB:ReflectiveThinking Blooms: Understand Topic: Money and How We Use It 87. Explainhow moneysolvestheproblemof the"doublecoincidenceof wants."

Ans:In aneconomythatdoesnotrelyon theuseof money,ifpeoplearegoingtospecializeat all theyhavetoresorttobarter,whichis theexchangeof onegood or servicefor another.In the situationof barter,it maybelikelythattheindividualwho haswhattheotherpersonwantswill notwantwhattheotherpersonhas.In thiscasemultipletradesmaybenecessarytoultimately obtainwhatisdesired.Withtheuseof money,sinceeveryonegenerallyacceptsit,oneexchange willsuffice.In realityyoucansaythat moneycreatesan immediatedoublecoincidenceof wants.

Difficulty: 02 Medium ALearning Objective: 02-01 ACSB:ReflectiveThinking Blooms: Understand Topic: Money and How We Use It 88. Suppose thereisaneconomythathas100 peopleeachof whommakesadifferentgood, and thattheyuse abartersystemfor exchange.How manyrelativepriceswill therebe?

Ans:Thegeneralformulafor thenumberof pricesisn (n-1)/2;wheren = thenumberof goods.

Sincewehave100 peopleeachproducingonegood, wehave100 goods, so n =100. Plugging this intoour formula,weobtain:100(99)/2=4,950;so therewillbe4,950 relativeprices. Difficulty: 03 Hard Learning Objective: 02-01

AACSB:Knowledge Application Blooms: Apply Topic: Money and How We Use It 89. Is thecharacteristicthatdistinguishesmoneyfromotherassetsitsabilitytobea storeof value?

Ans:No; therearemanyassetsthatfallinto thecategoryof financialassetsthataregood storesof value,theseincludebonds andstocks.Whatdistinguishesmoneyis thatit is liquid, meaningit can immediatelyserve asa meansof payment.This isnottrueof otherassets,which must beconvertedtospendableform.Moreover,itcan becostlyto turnabond or stock intoa meansof payment,especiallyif it mustbedoneon shortnotice.

Difficulty: 02 Medium Learning Objective: 02-01 AACSB: Reflective Thinking Blooms: Understand Topic: Money and How We Use It 90. Whatdistinguishescommoditymoneyfromfiatmoney?

Ans:Commoditymoney,suchasgoldor silver,hasvalueeven if it isnotusedasmoney.For example,goldcoinscouldbemelteddown andconvertedtojewelry.Fiatmoney,suchasU.S. papercurrencyreallyhasno valueotherthan itsuseasmoney.Itsvaluederivesfromthefact thatit isdeemedtobe legaltenderby theU.S. governmentandalong withpeople'swillingness toacceptit.

Difficulty: 02 Medium Learning Objective: 02-02 AACSB:Reflective Thinking Blooms: Understand Topic: The Payments System 91. DuringtheU.S. CivilWar theConfederategovernmenthadtoresorttoprintingcurrencyto obtainthegoods theyneeded.Commenton what youthinkhappenedtobothpricesand thevalue of thiscurrencyat theendof thewar.

Ans:WhiletheConfederategovernmentwasprintingthiscurrencyin increasingamountsthe pricesin theSouthundoubtedlywererising.Any timecurrencyismadeincreasinglyavailable theeventualresultwillbehigherprices.In addition,whenthewarendedand theConfederate states lost, thecurrencywasbasicallyworthlesssincetherewasno governmentthatcould guaranteeitsvalue.Itwasprobablythecasethatas it wasbecomingclearertopeopleliving in Confederatestatesthattheoutcomeof thewarwasnotgoing tobein theirfavor, itwouldnot havebeensurprisingifthepeoplereliedlesson thecurrencyandmoreon barter.

Difficulty: 03 Hard Learning Objective: 02-02 AACSB:Analytical Thinking Blooms:Analyze Topic: The Payments System 92. You purchasea good by writinga checkfor $1,000. Consideringthefinancialpayments system thischeckfollows,when is thecheckmoney?Explain.

Ans:Thecheckitself isnever money;ratherit is thebalanceson depositthatrepresentmoney.

Thereforethe$1,000 wasmoneywhenit was inyourcheckingaccountand that$1,000 willbe moneyagainwhen theFederalReservecreditsthereserveaccountof thebankreceivingthe check(anddebitsyourbank'sreserveaccount).

Difficulty: 02 Medium Learning Objective: 02-02 AACSB:Analytical Thinking Blooms:Analyze Topic: The Payments System 93. Explainwhycreditcards arenotconsideredmoneyeventhoughpeopleseemtouse them like money.

Ans:A creditcardisn'tmoneyfor afewreasons.One,itisnotanasset.Theuse of acreditcard actuallycreatesa liabilityfor theuser.A creditcardisa promisebyabank to lend thecardholder moneywithwhichtomakepurchases.Thestoresupplying thegoods beingpurchasedreceives money,butthemoneythatisuseddoesnotbelong to thebuyer.Thecreditcardprovidesthe cardholderwithaccesstosomeoneelse's money.

Difficulty: 02 Medium Learning Objective: 02-02 AACSB:Reflective Thinking Blooms: Understand Topic: The Payments System 94. Explainthedifference(s)betweenadebitcard andacreditcard.

Ans:A debitcardworks thesamewayasa check,inthatitprovidesthebankwithinstructionsto transferfunds fromthecardholder'saccountto themerchant'saccount.Thedebitcard-holder must haveadequatefunds inhis/hercheckingaccounttocoverthepurchase.A creditcardisa promiseby abanktolendthecardholdermoneywithwhichto makepurchases.Thestoresupplying thegoods beingpurchasedreceivesmoney,butthe moneythatisuseddoesnotbelong tothebuyer,thecreditcard providesthecardholderwithaccesstosomeoneelse's money.

Difficulty: 02 Medium Learning Objective: 02-02 AACSB:Reflective Thinking Blooms: Understand Topic: The Payments System

95. Rank thefollowingassetsfrommostliquidtoleastliquid. a)Commonstock b) Houses c)Currency d) Art e)Savingsaccounts f) Checkingaccountdeposits.

Ans:Rankedfrommostliquidto leastliquid:#1) Currency;#2 Checkingaccountdeposits;#3) Savingsaccounts;#4) CommonStock:#5) Houses;#6) Art. Difficulty: 01 Easy Learning Objective: 02-03

AACSB: Reflective Thinking Blooms: Understand Topic: Measuring Money

96. Duringwhatperiodwasmoneya betterstoreof value:1960-1980 or 1990-2009?Explain.

Ans:Theperiod1990-2009. Duringtheperiod1960-1980, inflationoftenrose tomorethan5 percent;duringtheperiod1990-2000, it rarelydid.

Difficulty: 02 Medium Learning Objective: 02-03 AACSB:Analytical Thinking Blooms: Evaluate Topic: Measuring Money 97. Whatis includedinM2 thatisnotincludedinM1?

Ans:Smalldenominationtimedeposits,plussavingsdepositsandmoneymarketdeposit accountsandretailmoneymarketmutualfund shares. Difficulty: 01 Easy Learning Objective: 02-03 AACSB:Reflective Thinking Blooms: Remember Topic: Measuring Money 98. Havethegrowthratesof thetwomeasuresof moneymoved togetherovertime?Explain.

Ans:From1960 to1980 thegrowthratesof thetwomoney measuresdidmovetogether.After 1980 M1 behavedverydifferentlythanM2. Themainreasonfor thisseemstobethehighrates of inflationthatbeganinthelate1970s andfosteredinnovationintoothertypesof accountsthat peoplecouldholdtoearn ahigherreturnandyetwererelativelyliquid,suchasmoney market accounts.

Difficulty: 02 Medium Learning Objective: 02-03 AACSB:Analytical Thinking Blooms:Analyze Topic: Measuring Money 99. How usefulisM2 in trackinginflation?Explain.

Ans:Empiricalresearchmentionedinthechaptershows thatacrossmanycountries,high ratesof growth inM2 wereassociatedwithhighratesof inflationandrelativelylowgrowthratesinM2 inmanycountriesalsowereassociatedwithlowratesof inflation.For thisreason many economistsbelievethat,at leastfor moderateinflationrates,controllinginflationmeans controllingthe moneygrowth.

Difficulty: 02 Medium Learning Objective: 02-03 AACSB:Analytical Thinking Blooms:Create Topic: Measuring Money 100. HasM2 alwaysbeenausefultoolfor forecastinginflation?Explain.

Ans:From1960 to1980 it seemed thatgrowthof M2 wasagood tooltoforecastinflation,with a twoyearlag;infactthecorrelationwasover0.5. For theyears1990 to2016thisdoesnot seemtobethecase,infactthecorrelationwas0. Thereisno clearexplanationfor why the growthof M2 hasceasedbeingagood forecasttoolfor inflation,buttherearesomeideas economistsareresearching.

Difficulty: 02 Medium Learning Objective: 02-03 AACSB:Analytical Thinking Blooms:Analyze Topic: Measuring Money 101. Whydo economistsclaimtheConsumer PriceIndex(CPI) tendstooverstatetheactualrate of inflation?

Ans:TheCPI ismeasuredusingafixed-expenditure-weightindex.As aresult,whenthepriceof a good includedin theindexincreasestheassumptionispeoplecontinuetopurchasethesame quantityof thisitemwheninreality manyconsumers(towhateverdegreepossible)maystop purchasingthisitemandselecta lowerpricedsubstitute. Thissubstitutiontowarda lower-priced good isnotreflectedinthereportedCPI. Difficulty: 03 Hard Learning Objective: 02-03 AACSB:Analytical Thinking Blooms:Analyze Topic: Measuring Money 102. How hastheBureauof LaborStatistics(BLS)changedthecalculationof theCPI inorder totakesubstitutionbias intoaccount?

Ans:Substitutionbiasisanoverstatementof inflationbythe CPIthatcomesfromthefactthat thecalculationof theindexisbasedon theassumptionof anunchangingmarketbasketof goods andservices.Sincepricesdo notallriseatthesamerate(andsomemaynotriseor mayeven fall),peoplecan avoidsomeinflationby changingtheirspendingpattern,thatis,substituting lowerpricedgoods inplaceof those whosepriceshaverisen.In orderto takethisintoaccount, theBLSnow changestheweightsused in the CPIeverytwoyears, and today'sCPI isamuch moreaccuratemeasureof inflationthantheonepublishedadecadeago.

Difficulty: 03 Hard Learning Objective: 02-03 AACSB:Analytical Thinking Blooms:Analyze Topic: Measuring Money 103. Whatwas thedoubleliquidityshockthatoccurredin theUS financialsysteminthe summerof 2007?

Ans:Investorsbegantodoubtthevalueof a wideclassof securitiesso marketliquidityfor those instrumentsdisappearedandfinancialinstitutions thatheld themfacedlargelosses.In turn, fundingliquidityfor theseinstitutionsdriedup as thepotentiallossescausedtheirlenderstobe worriedabouttheirsafety.

Difficulty: 02 Medium Learning Objective: 02-01

AACSB:ReflectiveThinking Blooms: Understand Topic: Money and How We Use It 104. Whyareelectronictransactionsincreasinglytakingtheplaceof papertransactions?

Ans:Becauseefficientpaymentssystemscontinuetoevolveandseekeasierandcheaperwaysto payfor things.

Difficulty: 02 Medium Learning Objective: 02-02 AACSB:ReflectiveThinking Blooms: Understand Topic: The Payments System

EssayQuestions 105. Consider twobartereconomies:Duos andVarietas.Duos producestwodifferentgoods, whereasVarietasproduces80 differentgoods. Bothcountrieshavethesamenumberof people. In whichbartereconomyis it morelikelythatthe meansof paymentand theunitsof account wouldbeefficient?How manyrelativepricesarethereinDuos comparedwithVarietas?Which economywouldbenefitmorefromadoptingmoney?

Ans:Payments wouldbefareasierandefficientinDuos. Withfewergoods tobe traded,the likelihoodof reachingadoublecoincidenceof wantswouldbegreater.Also,withfewergoods beingproduced,theneedfor specializationisnotasgreatas it wouldbeinVarietas.With80 differentgoods, peopleinVarietasarelikelytobespecialized.Also,withmanydifferentgoods, theneedfor information ismuch greaterinVarietas.Duos wouldhaveonerelativeprice,1=2(21)/2.Varietaswouldhavethousandsof relativeprices:3,160 =80(80-1)/2.This suggeststhat quotingpricesandrecordingdebtswouldbeeasierinDuos. Varietaswouldbenefitmorefrom adoptingmoney,for thereasonscitedabove.

Difficulty: 02 Medium AACSB:Analytical Thinking Learning Objective: 02-01 Blooms:Analyze Topic: Money and How We Use It 106. After theRevolutionaryWar,theU.S. monetary system was based ongold. Historically, whydid theU.S. adopttheuseof goldasacurrency?How doesthiscomparewith thecurrencyusedtoday?

Ans:Historically, theU.S. adoptedtheuseof goldasacurrency(or asawaytobackpaper notes)becausepeoplehadgrown suspiciousof theuseof fiatmoney.DuringtheRevolutionary War, theContinentalCongressissuedcontinentalsthatbecameworthlesswithrisinginflation.

Usinggoldtobackcurrencygavethepublictrustinthegovernment'sabilityanddesireto protectitsvalue(e.g.,topreventrisinginflation).Today, thecurrencyprintedby theU.S. TreasuryBureauof EngravingandPrintingisfiatmoney.Thatis, it haslittleor no intrinsic value.Thegeneralpubliciswilling touse thisfiatmoneybecauseit trusts thegovernment'spromisetoprotectitsvalue.Peoplehaveanexpectationthattheywillbeabletouse theexisting currencytopayfor goods andservices.

Difficulty: 02 Medium Learning Objective: 02-02 AACSB:Analytical Thinking Blooms:Analyze Topic: The Payments System 107. Historically, somegovernmentshaverelied on therevenuegeneratedfromprintingcurrency tofinancegovernmentspending.Givetwoexamplesof government'srelyingon papercurrency to financewartimeexpenditures.Whatdo youexpecthappenedtoinflationratesduringthesehistoricalepisodes?

Ans:TheContinentalCongressissuedcontinentalsin1775 tofinancetheRevolutionaryWar. TheFrenchRevolutionaryGovernmentissuedassignatsin1793. Theinflationratesduringboth historicalepisodesincreased.Themoneysupplyis linkedto theeconomy'sinflationrate.As the moneysupplygrows atafasterrate,theinflationraterises.

Difficulty: 02 Medium Learning Objective: 02-02 AACSB:ReflectiveThinking Blooms: Remember Topic: The Payments System 108. In thechapteryoureadthatit costs theU.S. Treasury's Bureauof EngravingandPrinting around 5 ½ centstoprinta $1 bill, 10 ½ cents to print a $20 bill, and a bit over 14 cents to print a $100 bill.It seemstheTreasurycouldgenerateaniceprofitfor thegovernmentbysimply printingcurrencyandusing thiscurrencytopurchasethegoods andservicesthegovernment needs.In fact,thisseemstobea way toeliminatetheproblemof budgetdeficitsfor theU.S. government.Commenton thisidea.

Ans:Atfirstit seemstheTreasurycouldbuy onehundreddollar’sworthof goods for anactual costof lessthanfourteencents,thecostof printingthenote.Plus theTreasurycan avoidhavingto borrow tofinancethedifferencebetweentax receiptsandexpenditures.Butwhatmaybe profitablefor theTreasurycanbeveryharmfulto theeconomy.Theprintingof thisadditional currencycan havemanyseriousconsequences.Theadditionalcurrencywill increasethe money supply, whichcanfuelhigherprices,loweringtherealpurchasingpowerof money.If the problembecomeslargeenough it canactuallymakepeoplereluctanttoacceptthecurrencyasa meansof paymentand theywouldrevertto increaseduseof barterwhichcanmaketheeconomy lessefficient.

Difficulty: 03 Hard Learning Objective: 02-02 AACSB:Analytical Thinking Blooms:Analyze Topic: The Payments System

109. A famousAmericanhasbeenvisitingthesame tropicalisland for 15 years for vacations.

Whenshegoesshepaysfor everythingby writingchecksdrawnon herU.S. bank.Thecurrency thenativesuse arenotU.S. dollars;theyusea currencycalledafungo. Thenativesnevercash her checks.Sheisso wellknown on theisland thatthenativessimplytradeherchecksamong themselves.Thequestionyouneed toanswer,completewithanexplanation,is: who ispaying for her vacation?(You canassumeher bankwouldhonor thechecksifpresentedfor payment

evenafteraconsiderableperiodof timehaspassed.)

Ans:ObviouslyneitherthefamousAmericannor herbank ispayingfor thevacationsincethe checksareneverpresentedfor payment.On theotherhand, thefamous Americanisproviding thepeopleon theisland withadditionalmoney,which theyseemverycomfortableusing. As a result,the moneysupplyon theislandhasincreasedbytheamountof thesechecks.Oneresultof theaddedmoneywillbeinflation,so islanderswillseetherealpurchasingpowerof theirmoney decrease,thus theirloss inrealpurchasingpowerhasbeenusedtopayfor thefamous American'svacations.

Difficulty: 03 Hard Learning Objective: 02-02 AACSB:Analytical Thinking Blooms:Analyze Topic: The Payments System

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