1. When people use money by trading it for goods and services, money is serving the role of a
a. medium of exchange.
b. unit of account.
c. store of value.
d. standard of deferred payment.
2. As a medium of exchange, money makes exchanges easier by reducing
a. inflation.
b. transactions costs.
c. production costs of goods.
d. legal costs in negotiating loan contracts.
3. Costs of trading are referred to as costs.
a. trading
b. menu
c. shoe-leather
d. transactions
4. When two producers are trading without money, each must want what the other produces. This requirement is
referred to as
a. the barter condition.
b. double coincidence of wants.
c. comparative advantage.
d. specialization in production.
5. Which of the following functions of money encourages specialization in the production of goods and services?
a. Unit of account
b. Store of value
c. Standard of deferred payments
d. Medium of exchange
6. When money is used as a value in which prices are denoted, money is serving the role of a
a. medium of exchange.
b. unit of account.
c. store of value.
d. standard of deferred payment.
7. Gresham’s Law states that
a. the more you make, the more you spend.
b. bad money drives out good money.
c. money supply creates its own demand.
d. money is not a suitable medium of exchange.
8. According to Gresham‘s law
a. the product of the money supply and velocity of money is always equal to the transactions demand for money.
b. increases in interest rates increases the speculative demand for money.
c. whenever there are two different types of money circulating, people hoard the good one, and use the bad one
as a medium of exchange.
d. as an economy grows, the inequality in the distribution of income in the economy initially increases, then
reaches a maximum, after which it eventually decreases.
9. When people keep money for some period instead of spending it or investing it, money is serving the role of a
a. medium of exchange.
b. unit of account.
c. store of value.
d. standard of deferred payment.
10. Inflation affects money by
a. increasing money’s efficiency as a medium of exchange.
b. limiting money’s role as a store of value.
c. reducing the supply of money.
d. reducing transactions and search costs.
11. Higher the rate of inflation
a. slower will be the rate at which money will lose value.
b. lower will be the will to spend money.
c. lower will be the will to hold money.
d. lower will be the will to invest money.
12. Hyperinflation occurs when
a. the inflation rate is extremely high.
b. a dollar today has the same real value as one million dollars last year.
c. the inflation rate is negative.
d. the inflation rate is positive and below 10%.
13. An inflation rate exceeding 50 percent per month is referred to as
a. hyperinflation.
b. deflation.
c. disinflation.
d. core inflation.
14. When you buy something one day and pay for it later, the repayment you make is denoted in terms of money. In this
case, money is serving the role of a
a. medium of exchange.
b. unit of account.
c. store of value.
d. standard of deferred payment.
15. The law states that a lender must accept money in the repayment of debts. This means that money is a
a. unit of account.
b. medium of exchange.
c. facilitator of barter exchange.
d. legal tender.
16. If money is a legal tender, it implies that a must accept in the repayment of debts, by law.
a. lender; only non-monetary payments
b. borrower; money
c. borrower; only non-monetary payments
d. lender; money
17. Which of the following is NOT a function of money?
a. It acts as a medium of exchange.
b. It acts as a Store of value.
c. It enables barter trade.
d. It can be used as a standard of deferred payment.
18. The set of mechanisms used for making transactions is called the
a. outside money mechanism.
b. payments system.
c. inside money system.
d. standard of deferred payments.
19. Outside money is
a. money created by the government or by nature.
b. money created by the private sector, such as checking accounts at banks.
c. foreign currency.
d. checks that are in the process of clearing but have not cleared yet.
20. Money whose value is determined by its value as a material is referred to as
a. inside money.
b. outside money.
c. commodity money.
d. artificial money.
21. If money is gold or silver, it is called money
a. fiat
b. inside
c. commodity
d. glitter
22. Another name for commodity money is
a. fiat money.
b. glitter money.
c. full–bodied money.
d. inside money.
23. Which of the following statements is true of commodity money?
a. The manufacturing cost is cheaper than that of fiat money.
b. Large quantities of commodity money may not be portable.
c. The most common example of commodity money is paper currency.
d. Commodity money has value because it is decreed by the government.
24. Money that has value in large part by the government’s proclamation is known as
a. fiat money.
b. M1.
c. full–bodied money.
d. inside money.
25. U.S. currency is currently
a. representative money.
b. full-bodied money.
c. inside money.
d. fiat money.
26. Which of the following statements correctly identifies a disadvantage of fiat money?
a. It is very expensive to manufacture.
b. It cannot be used for international transactions.
c. It is possible to create counterfeit fiat money.
d. It can be created only in the private sector.
27. Which of the following statements correctly differentiates between commodity money and fiat money?
a. Commodity money is created by the government while fiat money is created in the private sector.
b. Fiat money is created by the government while commodity money is created by the government.
c. Commodity money can be used for transactions in the international market, while fiat money cannot be used
for transactions in the international market.
d. Fiat money has value decreed by the government, while commodity money is valued because of the material it
is made of.
28. Money that is created in the private sector, such as checking accounts at banks, is referred to as:
a. representative money.
b. commodity money.
c. outside money.
d. inside money.
29. An example of inside money is
a. Fedwire.
b. silver.
c. a traveler‘s check.
d. $100 bills.
30. Which of the following statements correctly identifies a difference between inside money and outside money?
a. Inside money has value because the government decrees that it has value for payment of taxes, while outside
money has value because it is made using expensive metals.
b. Inside money consists of wages and salaries earned by employees in the private sector, while outside money
consists of wages and salaries earned by employees of the government sector.
c. Inside money cannot be used for making purchases from foreign sellers, while outside money can be used for
making purchases from foreign sellers.
d. Inside money is created in the private sector, while outside money is created by the government or by nature.
31. Which of the following statements correctly identifies an advantage of checking accounts over cash?
a. Checks are more convenient to use for day to day transactions.
b. Checks are accepted by almost all sellers while cash may not be accepted.
c. Checks are more liquid than cash.
d. Lost or stolen checks cannot be used unless they have the account holder’s signature.
32. A mechanism by which a short-term loan is made, allowing a shopper to purchase goods or services today and pay
for it at a later date, is known as a card.
a. debit
b. commodity
c. credit
d. fiat
33. Currently in the United States, money in checking accounts is
a. commodity money.
b. outside money.
c. inside money.
d. illegal tender.
34. A type of inside money that allows a shopper to prepay some amount and then spend it at her will is a card.
a. debit
b. credit
c. commodity
d. stored-value
35. Fedwire is called a(n) payment system.
a. real-time
b. real-good
c. inside
d. fiat
36. The Fed measures the money supply following a system based mainly on
a. the liquidity and size of various bank accounts.
b. the interest rate on different assets.
c. the correlation of different assets with GDP growth.
d. legal requirements.
37. The liquidity of a monetary asset is
a. the difference between the interest rate on the asset and the interest rate on short-term government
securities.
b. how quickly and easily it can be used to purchase goods and services.
c. its time to maturity.
d. also called its principal value.
38. Which of the following monetary assets is likely to be most liquid?
a. Currency
b. Traveler’s checks
c. Funds in checking accounts
d. Money held as certificate of deposits
39. Which of the following monetary assets is likely to be least liquid?
a. Coins and currency
b. Travelers checks
c. Funds held in checking accounts
d. Funds held as certificate of deposits
40. A measure of the total supply of money in the economy is referred to as
a. monetary aggregate.
b. liquidity total.
c. the velocity of money.
d. inside money.
41. M1 consists of
a. coins, paper currency, and travelers checks.
b. coins, paper currency, travelers checks, and amounts in checking accounts.
c. coins, paper currency, travelers checks, and amounts in checking accounts and savings accounts.
d. coins, paper currency, travelers checks, and amounts in checking accounts and retail money-market mutual
funds.
42. M2 includes
a. large–denomination time deposits.
b. term repurchase agreements.
c. stockholder’s equity of banks.
d. M1.
43. M2 consists of
a. amounts in savings accounts, money-market mutual funds (held by individuals), and small time deposits (under
$100,000).
b. amounts in savings accounts, and money-market mutual funds (held by individuals).
c. M1 plus amounts in savings accounts, money-market mutual funds (held by individuals), small time deposits
(under $100,000), and repurchase agreements issued by banks.
d. M1 plus amounts in savings accounts, money-market mutual funds (held by individuals), and small time
deposits (under $100,000).
44. Suppose your bank lowers its minimum balance requirement by $500. So you take $500 out of your checking account
and put it into a money market deposit account. What is the overall effect on M1 and M2?
a. M1 falls by $500, M2 rises by $500.
b. M1 is unchanged, M2 is unchanged.
c. M1 falls by $500, M2 is unchanged.
d. M1 is unchanged, M2 rises by $500.
45. In an economy, the amount of money held in currency and coins is $3,500, the amount of money held as traveler’s
check is $1,000, the amount of money held as checkable deposits is $2,000, the amount of money held in savings
deposit is $4,000, and the amount of money held with retailed money market mutual funds is $700. M1 in the
economy equals
a. $3,500.
b. $6,500.
c. $10,500.
d. $11,300.
46. Aaron takes $100 out of his checking account and puts it in his savings account while Biff withdraws $200 from his
money-market mutual fund in the form of cash. The total effect is that M1 and M2 .
a. is unchanged; falls by $100
b. is unchanged; is unchanged
c. rises by $100; falls by $100
d. rises by $100; is unchanged
47. The reason why people are putting more funds in checking and savings account rather than in time deposits is that
a. checking and savings account accept fiat money, while time deposits do not.
b. long-term interest rates have declined in recent years, relative to short term interest rates.
c. liquidity of money held in checking and savings accounts is less than that of money held in time deposits.
d. only a few banks accept time deposits, while most banks accept checking and savings accounts.
48. The demand for U.S. currency increased in the early 1990s mainly because
a. banks began charging higher ATM fees.
b. demand increased from Eastern Europe.
c. people began hoarding coins.
d. interest rates declined, reducing the opportunity cost of holding cash.
49. Most U.S. currency is held by
a. U.S. citizens.
b. banks.
c. the Federal Reserve.
d. foreigners.
50. Credit cards are
a. not counted as money because they represent borrowings and not payments.
b. counted as part of M1.
c. the same as stored-value cards.
d. counted as part of M2, but not M1.
51. Carter’s $150,000 CD matures and he deposits the funds into his checking account so he can buy a house. The total
effect is that M1 and M2 .
a. is unchanged; falls by $150,000
b. rises by $150,000; is unchanged
c. rises by $150,000; falls by $150,000
d. rises by $150,000; rises by $150,000
52. Dividing the amount of U.S. currency in circulation by the number of people in the United States shows that, on an
average, each person holds almost $3,000 in cash. The most important explanation for this remarkably large sum is
that
a. the underground economy in the United States is huge, with many dollar transactions.
b. huge amounts of cash have been lost over time.
c. most of the cash is circulating in foreign countries.
d. banks keep huge amounts of cash in their ATMs and bank vaults.
53. Which of the following statements is true?
a. Assets counted in M1 are more liquid than assets counted in M2.
b. M2 is a part of M1.
c. Credit card spending is counted as part of M1.
d. Savings deposits are included in M1.
54. M1 – coins and currency – amount in travelers checks equals
a. M2.
b. amount held in checking accounts.
c. amount held in savings deposits.
d. amount held in time deposits.
55. In the United States, coins are produced by and distributed around the country by .
a. the U.S. Mint; the Federal Reserve.
b. the Bureau of Engraving and Printing; the Treasury Department.
c. the U.S. Mint; the Treasury Department.
d. the Bureau of Engraving and Printing; the Federal Reserve.
56. Under the fiat money system, the revenue that the government makes on every coin issued is referred to as
a. fiat revenue.
b. full-bodied revenue.
c. money tax.
d. seignorage revenue.
57. The main source of the U.S. coin shortage in 1999 was
a. increased demand for coins from foreign countries.
b. a new law allowing coins to be melted for their metal content.
c. the introduction of the state quarter program.
d. the introduction of the Sacagawea golden dollar.
58. The new coin introduced in 2000, which added to the coin shortage that had begun in 1999, was the
a. Sacagawea golden dollar.
b. Virginia state quarter.
c. Buffalo nickel.
d. Dale Earnhardt dollar.
59. Describe each of the four functions of money and provide an example of how money serves these roles.
60. A bill is introduced into Congress proposing that the U.S. go back to the gold standard, in which only gold coins could
circulate as money. What are the major drawbacks of such a proposal?
61. Describe the difference between inside money and outside money, and explain whether each of the following items
represent inside money or outside money:
a. Checking accounts
b. Coins
c. Travelers checks
d. Money-market mutual funds
e. $100 bills
62. Gary Goldwater has $5,000 in cash. He deposits $1,000 in his checking account, buys $500 of traveler’s checks, puts
$1,500 in his money-market mutual fund, and buys a $2,000 CD. How does this transaction affect M1 and M2?
63. Donovan’s $200,000 CD matures. He deposits $20,000 into his checking account, buys a CD for $150,000, and puts
$30,000 into his money-market mutual fund. How does this affect M1 and M2?
64. Donovan’s $200,000 CD matures. He deposits $20,000 into his checking account, buys a CD for $80,000, and puts
$100,000 into his money-market mutual fund. How does this affect M1 and M2?
65. Why did M1 grow so rapidly in the early 1990s, whereas M2 did not?
66. What is seignorage revenue and how does it apply to U.S. coins?
67. Describe the coin shortage of 1999 and 2000 and describe why it occurred. What ended the shortage?