Economics of Money, Banking, and Financial Markets, 12e, Global Edition (Mishkin)
Chapter 3 What Is Money?
3.1 Meaning of Money
1) To an economist, ________ is anything that is generally accepted in payment for goods or
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 or 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 “moneyness” 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 person’s
A) wealth.
B) income.
C) money.
D) credit.
6) A person’s 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 individual’s annual salary is her
A) money.
B) income.
C) wealth.
D) liabilities.
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.
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 economists’ 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.
14) When we say that income is a flow variable, we mean that
A) we must attach a time period to the measure for it to make sense.
B) it is measured at a given point in time.
C) it moves through our hands quickly.
D) the value is constantly changing.
3.2 Functions of Money
1) Of money’s 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) reduces
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 a $100 bill 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) When there are many goods in a barter system,
A) transactions costs are minimized.
B) there are multiple 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 account.
C) store of value.
D) 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) traveler’s 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) money’s 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) During the German hyperinflation after World War I, transactions costs skyrocketed. As a
result, not surprisingly, output
A) declined sharply.
B) increased dramatically.
C) did not change.
D) grew at a much smaller pace than prior to the war.
37) Explain how cigarettes could be called “money” in prisoner-of-war camps of World War II.