Chapter 02 – Money and the Payments System
61. Between 1960 and 1980:
62. M1 has decreased in its usefulness in understanding inflation due to:
D. The increased use of electronic payments
63. The introduction of money market substitutes for basic checking accounts was fueled
partially by:
D. The higher interest rates banks had to pay on checking accounts
Chapter 02 – Money and the Payments System
64. A cross-country analysis of money growth supports the conclusion that:
A. There is no correlation between the growth rate of the quantity of money and the rate of
inflation
65. A cross-country analysis of money growth shows that:
D. The growth rate in the money supply was the same whether the countries had high or low
inflation rates
66. The Consumer Price Index (CPI):
A. Is an example of an index that uses variable expenditure weights
Chapter 02 – Money and the Payments System
67. The Consumer Price Index (CPI):
D. Assumes that consumers substitute away from cheaper goods
68. The Consumer Price Index (CPI):
D. Understates the impact of price changes
69. Economists study the link between money and inflation because:
D. The Fed needs to increase the money supply as prices increase
Chapter 02 – Money and the Payments System
70. Inflation refers to growth in the economy’s:
71. When the price level increases, the purchasing power of money:
A. Increases by a similar amount
72. The purchasing power of money:
A. Rises when inflation rises
Chapter 02 – Money and the Payments System
73. Which of the following statements is incorrect?
A. If you can buy the same goods this year as you bought last year with less money there must
74. Which of the following statements is correct?
A. If you can buy the same goods this year as you bought last year with less money there must
75. The U.S. Treasury estimates that the fraction of U.S. currency held outside the United
States is:
A. About one-fourth
Chapter 02 – Money and the Payments System
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76. In countries with low inflation:
A. M2 growth is a very strong forecaster of inflation
77. Sue uses a credit card to purchase a new pair of jeans. Sue is:
D. Using a form of money included in M2
78. The value of money as a means of payment:
A. Is independent of changes in the amount of money in the economy
Short Answer Questions
Chapter 02 – Money and the Payments System
79. Consider the following: there are two countries, A and B. Each country has the same
resources, and produces the same goods. The residents of country A use money; the residents
of country B rely on bartering of goods. Will each country produce the same quantity of
output? Explain.
80. Consider an island where people use sand dollars (shells) as currency. For simplicity,
assume that people consume only one good: fish. Currently, there are 400 sand dollars in
circulation and there are 200 fish purchased each year. Based on this information, what is the
price of fish?
Now, suppose that a change in climate leads to new sand dollars washing ashore, leaving a
total of 500 sand dollars. If there are still 200 fish purchased each year, what is the new price
of fish? In order to prevent inflation, what would have to happen to the amount of fish
purchased each year?
Chapter 02 – Money and the Payments System
81. What does it mean to say that an asset is “liquid”?
82. There are three goods produced in an economy by three individuals:
If the orchard owner likes only bread, the baker likes only chocolate, and the candy maker
likes only oranges, will any trade between these three persons take place in a barter economy?
Explain.
Chapter 02 – Money and the Payments System
83. Many college campuses use student ID cards as a way for students to pay for on-campus
expenses, such as books, photocopies, and food. For convenience, some students will
maintain a balance on their ID cards. Are these balances a means of payment? Are they a
store of value? Explain why or why not.
84. If the income velocity of money is defined as nominal GDP divided by the money supply;
which has a greater velocity, M1 or M2?
Chapter 02 – Money and the Payments System
85. Explain why the following statement is true, “money is an asset but not all assets are
money.”
86. Explain how money solves the problem of the “double coincidence of wants.”
87. Suppose there is an economy that has 100 people each of whom makes a different good,
and that they use a barter system for exchange. How many relative prices will there be?
Chapter 02 – Money and the Payments System
88. Is the characteristic that distinguishes money from other assets its ability to be a store of
value?
89. What distinguishes commodity money from fiat money?