Chapter 3 What Is Money?

3.1 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.

A) wealth

B) income

C) money

D) credit

2. Money is

A) anything 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) the total collection of pieces of property that are a store of value.

D) always based on a precious metal like gold or silver.

3. Currency includes

A) paper money and coins.

B) paper money, coins, and checks.

C) paper money and checks.

D) paper money, coins, checks, and savings deposits.

4. Even economists have no single, precise definition of money because

A) money supply statistics are a state secret.

B) the Federal Reserve does not employ or report different measures of the money
supply.

C) the ʺmoneynessʺ or liquidity of an asset is a matter of degree.

D) economists find disagreement interesting and refuse to agree for ideological reasons.

5. The total collection of pieces of property that serve to store value is a personʹs

A) wealth. B) income. C) money. D) credit.

6. A personʹs house is part of her

A) money.

B) income.

C) liabilities.

D) wealth.

7) ________ is used to make purchases while ________ is the total collection of pieces
of property that serve to store value. A) Money; income B) Wealth; income C) Income;
money D) Money; wealth

8) ________ is a flow of earnings per unit of time. A) Income B) Money C) Wealth D)

Currency

9) An individualʹs annual salary is her A) money. B) income. C) wealth. D) liabilities.

10. When we say that money is a stock variable, we mean thatA) the quantity of money
is measured at a given point in time. B) we must attach a time period to the measure.
C) it is sold in the equity market.D) money never loses purchasing power.

11. The difference between money and income is that

A) money is a flow and income is a stock.B) money is a stock and income is a flow. C)
there is no difference-money and income are both stocks. D) there is no difference-
money and income are both flows.

12. Which of the following is a true statement?

A) Money and income are flow variables. B) Money is a flow variable.C) Income is a
flow variable.D) Money and income are stock variables.

13. Which of the following statements uses the economistsʹ definition of money?

A) I plan to earn a lot of money over the summer. B) Betsy is richshe has a lot of
money.C) I hope that I have enough money to buy my lunch today.D) The job with
New Company gave me the opportunity to earn more money.
3.2 Functions of Money
1. Of moneyʹs three functions, the one that distinguishes money from other assets is its
function as a

A) store of value. B) unit of account. C) standard of deferred payment. D) medium of

exchange.

2. If peanuts serve as a medium of exchange, a unit of account, and a store of value, then
peanuts are

A) bank deposits. B) reserves. C) money.D) loanable funds.

3. ________ are the time and resources spent trying to exchange goods and services.

A) Bargaining costs. B) Transaction costs. C) Contracting costs. D) Barter costs.

4. Compared to an economy that uses a medium of exchange, in a barter economy

A) transaction costs are higher. B) transaction costs are lower. C) liquidity costs are
higher. D) liquidity costs are lower.

5. When compared to exchange systems that rely on money, disadvantages of the barter
system include:

A) the requirement of a double coincidence of wants. B) lowering the cost of exchanging

goods over time. C) lowering the cost of exchange to those who would specialize. D)
encouraging specialization and the division of labor.

6. The conversion of a barter economy to one that uses money

A) increases efficiency by reducing the need to exchange goods and services. B)

increases efficiency by reducing the need to specialize. C) increases efficiency by
reducing transactions costs.D) does not increase economic efficiency.

7. Which of the following statements best explains how the use of money in an economy
increases economic efficiency?

A) Money increases economic efficiency because it is costless to produce.B) Money

increases economic efficiency because it discourages specialization. C) Money increases
economic efficiency because it decreases transactions costs. D) Money cannot have an
effect on economic efficiency.

8. When economists say that money promotes ________, they mean that money
encourages specialization and the division of labor.
A) bargaining B) contracting C) efficiency D) greed

9. Money ________ transaction costs, allowing people to specialize in what they do best.
A) reduceks B) increases C) enhances D) eliminates

10. For a commodity to function effectively as money it must be

A) easily standardized, making it easy to ascertain its value. B) difficult to make change.
C) deteriorate quickly so that its supply does not become too large. D) hard to carry
around.

11. All of the following are necessary criteria for a commodity to function as money
except

A) it must deteriorate quickly. B) it must be divisible.C) it must be easy to carry.D) it

must be widely accepted.

12. Whatever a society uses as money, the distinguishing characteristic is that it must

A) be completely inflation proof. B) be generally acceptable as payment for goods and

services or in the repayment of debt. C) contain gold.D) be produced by the government.

13. All but the most primitive societies use money as a medium of exchange, implying
that

A) the use of money is economically efficient. B) barter exchange is economically

efficient.C) barter exchange cannot work outside the family. D) inflation is not a concern.

14. Kevin purchasing concert tickets with his debit card is an example of the ________
function of money.

A) medium of exchange B) unit of account C) store of value D) specialization

15. When money prices are used to facilitate comparisons of value, money is said to
function as a

A) unit of account. B) medium of exchange. C) store of value.D) payments-system ruler.

16. A problem with barter exchange when there are many goods is that in a barter system
A) transactions costs are minimized. B) there exists a multiple number of prices for each
good. C) there is only one store of value.D) exchange of services is impossible.

17. In 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.

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.

A) 20 B) 25 C) 30 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. A) 8 B) 6 C) 5 D) 4

20. Because it is a unit of account, money

A) increases transaction costs. B) reduces the number of prices that need to be calculated.
C) does not earn interest.D) discourages specialization.

21. Dennis notices that jackets are on sale for $99. In this case money is functioning as a
________.

A) medium of exchange B) unit of accountC) store of valueD) payments-system ruler

22. As a store of value, money

A) does not earn interest. B) cannot be a durable asset.C) must be currency.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

A) medium of exchange. B) unit of account. C) store of value.D) unit of specialization.

24. ________ is the relative ease and speed with which an asset can be converted into a
medium of exchange.

A) Efficiency B) Liquidity C) Deflation D) Specialization

25) Increasing transactions costs of selling an asset make the asset

A) more valuable. B) more liquid.C) less liquid.D) more moneylike.

26. Since it does not have to be converted into anything else to make purchases,
________ is the most liquid asset. A) money B) stock C) artwork D) gold

27. Of the following assets, the least liquid is

A) stocks. B) travelerʹs checks. C) checking deposits. D) a house.

28. Ranking assets from most liquid to least liquid, the correct order is

A) savings bonds; house; currency. B) currency; savings bonds; house. C) currency;

house; savings bonds. D) house; savings bonds; currency.

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.B) a unique good for which there are no substitutes. C) the only thing
accepted in economic exchange. D) backed by gold.

30. If the price level doubles, the value of money

A) doubles. B) more than doubles, due to scale economies.C) rises but does not double,
due to diminishing returns. D) falls by 50 percent.

31. A fall in the level of prices

A) does not affect the value of money. B) has an uncertain effect on the value of money.
C) increases the value of money.D) reduces the value of money.

32. A hyperinflation is

A) a period of extreme inflation generally greater than 50% per month. B) a period of
anxiety caused by rising prices.C) an increase in output caused by higher prices. D)
impossible today because of tighter regulations.

33. During hyperinflations,

A) the value of money rises rapidly.

B) money no longer functions as a good store of value and people may resort to barter
transactions on a much larger scale.

C) middle-class savers benefit as prices rise.

D) moneyʹs value remains fixed to the price level; that is, if prices double so does the
value of money.

34. Because inflation in Germany after World War I sometimes exceeded 1,000 % per
month, one can conclude that the German economy suffered from

A) deflation. B) disinflation. C) hyperinflation. D) superdeflation.

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

A) superdeflation. B) hyperdeflation. C) disinflation. D) hyperinflation.

36. Explain how cigarettes could be called ʺmoneyʺ in prisoner-of-war camps of World
War II.

3.3 Evolution of the Payments System

1. The payments system is

A) the method of conducting transactions in the economy. B) used by union officials to

set salary caps.C) an illegal method of rewarding contracts.D) used by your employer to
determine salary increases.

2. As the payments system evolves from barter to a monetary system,

A) commodity money is likely to precede the use of paper currency. B) transaction costs
increase.C) the number of prices that need to be calculated increase rather dramatically.
D) specialization decreases.

3. A disadvantage of ________ is that it is very heavy and hard to transport from one
place to another.

A) commodity money B) fiat money C) electronic money D) paper money

4. Paper currency that has been declared legal tender but is not convertible into coins or
precious metals is called ________ money.

A) commodity B) fiat C) electronic D) funny

5. When paper currency is decreed by governments as legal tender, legally it must be

________.

A) paper currency backed by gold B) a precious metal such as gold or silver C) accepted
as payment for debtsD) convertible into an electronic payment

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

A) paper is more costly to produce than precious metals. B) precious metals were not
generally acceptable. C) precious metals were difficult to carry and transport. D) paper
money is less accepted than checks.
7) Compared to checks, paper currency and coins have the major drawbacks that they

A) are easily stolen. B) are hard to counterfeit.C) are not the most liquid assets. D) must
be backed by gold.

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. B) they can never be stolen. C) they
are more widely accepted than currency.D) the funds from a deposited check are
available for use immediately.

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

A) government regulations designed to improve the efficiency of the payments system.

B) government regulations designed to promote the safety of the payments system. C)
innovations that reduced the costs of exchanging goods and services.D) competition
among firms to make it easier for customers to purchase their products.

10. Compared to an electronic payments system, a payments system based on checks has
the major drawback that

A) checks are less costly to process.

B) checks take longer to process, meaning that it may take several days before the
depositor can get her cash.

C) fraud may be more difficult to commit when paper receipts are eliminated.

D) legal liability is more clearly defined.

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 B) Barter, coins made of precious metals, checks, paper currency, electronic
funds transfers C) Barter, checks, paper currency, coins made of precious metals,
electronic funds transfers D) Barter, checks, paper currency, electronic funds transfers

12) During the past two decades an important characteristic of the modern payments
system has been the rapidly increasing use of

A) checks and decreasing use of currency. B) electronic fund transfers. C) commodity

monies. D) fiat money.
13. Which of the following is not a form of e-money?

A) a debit card B) a credit cardC) a stored-value card D) a smart card

14. A smart card is the equivalent of

A) cash. B) savings bonds.C) savings deposits.D) certificates of deposit.

15. An electronic payments system has not completely replaced the paper payments
system because of all of the following reasons except

A) expensive equipment is necessary to set up the system. B) security concerns. C)

privacy concerns. D) transportation costs.

16. In explaining the evolution of money

A) government regulation is the most important factor. B) commodity money, because it

is valued more highly, tends to drive out paper money. C) new forms of money evolve to
lower transaction costs.D) paper money is always backed by gold and therefore more
desirable than checks.

17) What factors have slowed down the movement to a system where all payments are
made electronically?

3.4 Measuring Money

1. Recent financial innovation makes the Federal Reserveʹs job of conducting monetary
policy

A) easier, since the Fed now knows what to consider money.

B) more difficult, since the Fed now knows what to consider money.C) easier, since the
Fed no longer knows what to consider money.D) more difficult, since the Fed no longer
knows what to consider money.

2. Defining money becomes ________ difficult as the pace of financial innovation

________.

A) less; quickens B) more; quickens C) more; slowsD) more; stops

3. Monetary aggregates are

A) measures of the money supply reported by the Federal Reserve. B) measures of the
wealth of individuals.C) never redefined since ʺmoneyʺ never changes. D) reported by the
Treasury Department annually.
4. ________ is the narrowest monetary aggregate that the Fed reports.

A) M0 B) M1 C) M2 D) M3

5) The currency component includes paper money and coins held in ________.

A) bank vaults B) ATMsC) the hands of the nonbank public D) the central bank

6) The components of the U.S. M1 money supply are demand and checkable deposits
plus

A) currency. B) currency plus savings deposits.C) currency plus travelers checks.D)

currency plus travelers checks plus money market deposits.

7) The M1 measure of money includes

A) small denomination time deposits. B) travelerʹs checks.C) money market deposit

accounts. D) money market mutual fund shares.

8) Which of the following is not included in the measure of M1?

A) NOW accounts. B) Demand deposits. C) Currency.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?

A) CurrencyB) Travelerʹs checks C) Demand depositsD) Small-denomination time

deposits

10) Which of the following is included in both M1 and M2?

A) Currency B) Savings depositsC) Small-denomination time deposits D) Money market

deposit accounts

11) Which of the following is not included in the monetary aggregate M2?

A) Currency B) Savings bondsC) Travelerʹs checks D) Checking deposits

12) Which of the following is included in M2 but not in M1?

A) NOW accounts B) Demand depositsC) CurrencyD) Money market mutual fund shares
(retail)

13) Of the following, the largest is

A) money market deposit accounts. B) demand deposits. C) M1.D) M2.

14) If 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.

15) If 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.

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. B) M1 stays the same and M2 increases. C) M1
stays the same and M2 stays the same. D) M1 increases and M2 decreases.

17) If 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.

18) If 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.

19) If 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.

20) Small-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

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.

B) The two measuresʹ movements closely parallel each other, even on a month-to-month
basis.

C) Short-run movements in the money supply are extremely reliable.

D) M2 is the narrowest measure the Fed reports.

22) The decade during which the growth rates of monetary aggregates diverged the most
is

A) the 1960s. B) the 1970s. C) the 1980s. D) the 1990s.

23) Why are most of the U.S. dollars held outside of the United States?