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) ________ money could be used for some other purpose other than as a medium of exchange,
for example, gold coins could be melted down and turned into gold jewelry.
A) Commodity
B) Fiat
C) Paper
D) Electronic
4) A disadvantage of ________made from precious metals 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
5) 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
6) 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 debts.
D) convertible into an electronic payment.
7) 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.
8) As a means of payment, coins have the major drawback that they
A) are heavy and hard to transport.
B) are hard to counterfeit.
C) are not the most liquid assets.
D) must be backed by gold.
9) Although ________ currency is lighter than coins made of metals, a disadvantage arising from
modern technology is the ease of ________.
A) paper; transport
B) commodity; counterfeiting
C) fiat; transport
D) paper; counterfeiting
10) An advantage of checks as a method of payment 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.
11) 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.
12) 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.
13) 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
14) 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.
15) Which of the following is NOT a form of e-money?
A) a debit card
B) a credit card
C) a stored-value card
D) a smart card
16) A smart card is the equivalent of
A) cash.
B) savings bonds.
C) savings deposits.
D) certificates of deposit.
17) 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.
18) 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.
19) A feature of Bitcoin, a new type of electronic money, that make it attractive as a medium of
exchange is
A) anonymous transactions.
B) volatility of value.
C) heavy regulations by the central bank.
D) wide acceptance by businesses.
20) Bitcoin fails to satisfy which two of the three functions of money?
A) unit of account and store of value
B) medium of exchange and unit of account
C) medium of exchange and store of value
D) bitcoin satisfies all of the functions of money
21) 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 Reserve’s 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; slows
D) 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 “money” 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) ATMs.
C) the hands of the nonbank public.
D) the central bank.
6) The other checkable deposits component of the M1 measure reported by the Federal Reserve
includes
A) negotiable time deposits.
B) money market mutual fund shares.
C) automatic transfer from savings accounts.
D) money market deposit accounts.
7) The components of the U.S. M1 money supply are demand deposits and other checkable
deposits plus
A) currency.
B) currency plus savings deposits.
C) currency plus traveler’s checks.
D) currency plus traveler’s checks plus money market deposits.
8) The M1 measure of money includes
A) small denomination time deposits.
B) traveler’s checks.
C) money market deposit accounts.
D) money market mutual fund shares.
9) Which of the following is NOT included in the measure of M1?
A) NOW accounts
B) demand deposits
C) currency
D) savings deposits
10) Which of the following is NOT included in the M1 measure of money but is included in the
M2 measure of money?
A) currency
B) traveler’s checks
C) demand deposits
D) small-denomination time deposits
11) Which of the following is included in both M1 and M2?
A) currency
B) savings deposits
C) small-denomination time deposits
D) money market deposit accounts
12) Which of the following is NOT included in the monetary aggregate M2?
A) currency
B) savings bonds
C) traveler’s checks
D) checking deposits
13) Which of the following is included in M2 but NOT in M1?
A) NOW accounts
B) demand deposits
C) currency
D) money market mutual fund shares (retail)
14) Of the following, the largest measure is
A) money market deposit accounts.
B) demand deposits.
C) M1.
D) M2.
15) 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.
16) 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.
17) 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.
18) 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.
19) 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.
20) 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.
21) If an individual uses money from a demand deposit account to purchase a U.S. savings bond
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 decreases and M2 decreases.
22) 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.
23) The M2 monetary aggregate contains everything that is in M1 plus other assets that are
highly ________ (can be turned into cash quickly at very little cost).
A) liquid
B) stable
C) consistent
D) efficient
24) 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 measures’ 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.
25) From 2004 to 2007, the growth rates of M1 and M2
A) were identical.
B) both increased but at different rates.
C) both decreased but at different rates.
D) moved in opposite directions.
26) The Federal Reserve publishes the data on the monetary aggregates each week on
A) Thursday.
B) Monday.
C) Friday.
D) Wednesday.
27) Why are most of the U.S. dollars held outside of the United States?