Chapter 02 – Money and the Payments System
90. During the U.S. Civil War the Confederate government had to resort to printing currency
to obtain the goods they needed. Comment on what you think happened to both prices and the
value of this currency at the end of the war.
91. You purchase a good by writing a check for $1,000. Considering the financial payments
system this check follows, when is the check money? Explain.
Chapter 02 – Money and the Payments System
92. Explain why credit cards are not considered money even though people seem to use them
like money.
93. Explain the difference(s) between a debit card and a credit card.
Chapter 02 – Money and the Payments System
94. Describe how money’s uses (means of payment, unit of account, and store of value) will
likely change in the future. Which feature of money is most likely to be retained over time
and why? Why are other features disappearing?
95. Rank the following assets from most liquid to least liquid.
a) Common stock
b) Houses
c) Currency
d) Art
e) Savings accounts
f) Checking account deposits.
Chapter 02 – Money and the Payments System
96. During what period was money a better store of value: 1960-1980 or 1990-2009?
Explain.
97. The income velocity of money is defined as nominal GDP divided by the money supply.
In the winter of 2010 the U.S. nominal GDP was estimated to be around $14.5 trillion
annually and M2 was $8463.5 billion. Would the income velocity of M2 be equal to 1; <1; or
> 1? Explain.
98. What is included in M2 that is not included in M1?
Chapter 02 – Money and the Payments System
99. Have the growth rates of the two measures of money moved together over time? Explain.
100. How useful is M2 in tracking inflation? Explain.
101. Has M2 always been a useful tool for forecasting inflation? Explain.
Chapter 02 – Money and the Payments System
102. Why do economists claim the Consumer Price Index (CPI) tends to overstate the actual
rate of inflation?
103. How has the Bureau of Labor Statistics (BLS) changed the calculation of the CPI in
order to take substitution bias into account?
Chapter 02 – Money and the Payments System
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104. What was the double liquidity shock that occurred in the US financial system in the
summer of 2007?
105. Why are electronic transactions increasingly taking the place of paper transactions?
Essay Questions
Chapter 02 – Money and the Payments System
106. Consider two barter economies: Duos and Varietas. Duos produces two different goods,
whereas Varietas produces 80 different goods. Both countries have the same number of
people. In which barter economy is it more likely that the means of payment and the units of
account would be efficient? How many relative prices are there in Duos compared with
Varietas? Which economy would benefit more from adopting money?
107. After the Revolutionary War, the U.S. used gold coins and notes backed by gold.
Historically, why did the U.S. adopt the use of gold as a currency? How does this compare
with the currency used today?
Chapter 02 – Money and the Payments System
108. Historically, some governments have relied on the revenue generated from printing
currency to finance government spending. Give two examples of government’s relying on
paper currency to finance wartime expenditures. What do you expect happened to inflation
rates during these historical episodes?
109. In the chapter you read that it cost The U.S. Treasury’s Bureau of Engraving and Printing
less than six cents to print a note (currency), whether that bill is a one-dollar or one-hundred
dollar bill. It seems the Treasury could generate a nice profit for the government by simply
printing currency and using this currency to purchase the goods and services the government
needs. In fact, this seems to be a way to eliminate the problem of budget deficits for the U.S.
government. Comment on this idea.
Chapter 02 – Money and the Payments System
110. A famous American has been visiting the same tropical island for 15 years for vacations.
When she goes she pays for everything by writing checks drawn on her U.S. bank. The
currency the natives use are not U.S. dollars; they use a currency called a fungo. The natives
never cash her checks. She is so well known on the island that the natives simply trade her
checks among themselves. The question you need to answer, complete with an explanation,
is: who is paying for her vacation? (You can assume her bank would honor the checks if
presented for payment even after a considerable period of time has passed.)