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Chapter 15
Money, Banking, and Central Banking
15.1 The Functions of Money
1) In a barter system, we would expect to see
A) many different units of money.
B) money and goods exchanged for each other.
C) wide spread financial institutions.
D) goods traded directly for other goods and services.
2) Money functions as a(n)
A) store of value. B) unit of account.
C) medium of exchange. D) all of the above.
3) A barter arrangement essentially means
A) a cashless transaction. B) a credit deal.
C)
b
uying with an I.O.U. D) swapping goods for cash.
4) For barter to occur there must be
A) hyperinflation.
B) a double coincidence of wants for each good to be exchanged.
C) one person who pays cash.
D) two people willing to pay with credit.
5) A barter arrangement simply means
A) a direct exchange of goods without the use of money.
B) a promise to pay in the future.
C) that gold must be offered from one party.
D) the government has paid for the goods.
6) The direct exchange of goods and services for other goods and services is known as
A)
b
arter. B) purchasing power.
C) intermediation. D) wholesale trade.
7) Without an accepted medium of exchange, people
A) have to specialize in one area of production.
B) have to rely on gold or silver in order to exchange goods and services.
C) have to resort to barter in order to exchange goods and services.
D) can efficiently obtain goods and services.
8) As a result of money in an economy,
A) people are greedier than in a barter economy.
B) stealing exists and people have to find ways to prevent theft.
C) transaction costs are higher than would be the case in a barter economy.
D) real Gross Domestic Product (GDP) and economic growth are greater than they would be
in a barter economy.
9) Which of the following represents a function of money?
A) medium of exchange B) unit of accounting
C) standard of deferred payment D) all of the above
10) Money is defined as
A) a person s net worth.
B) anything people generally accept in exchange for goods and services.
C) a by product of a barter economy.
D) any financial instrument that is backed by gold.
11) Which of the following statements does NOT describe a function of money?
A) A store of value B) A hedge against inflation
C) A standard of deferred payment D) A unit of accounting
12) When you buy a hamburger for lunch, you are using money as a
A) store of value. B) standard of deferred payment.
C) medium of exchange. D) unit of accounting.
13) When money is accepted as payment in a market transaction, it is functioning as a
A) store of value. B) unit of accounting.
C) medium of exchange. D) unit of investment.
14) Money as a medium of exchange
I. Facilitates the exchange of goods
II. Reduces the incentive to barter
A) I only B) II only C) Both I and II D) Neither I nor II
15) The use of money as a medium of exchange
I. lowers transaction costs.
II. permits more specialization.
A) I only B) II only C) Neither I nor II D) Both I and II
16) A $35,000 price tag on a new car is an example of money as
A) a medium of exchange. B) a unit of accounting.
C) a store of value. D) a time deposit.
17) When money provides a yardstick that allows individuals to compare the relative values of
goods and services, it is functioning as a
A) medium of exchange. B) unit of accounting.
C) store of value. D) standard of deferred payment.
18) When money serves as a standard for comparing values of different things, it is functioning as a
A) store of value. B) hedge against inflation.
C) standard of deferred payment. D) unit of accounting.
19) To function as money, something must hold its purchasing power over time. That is, it must be
a
A) store of value. B) standard of deferred payment.
C) unit of accounting. D) medium of exchange.
20) If you save $2,500 for a down payment on a new car, you are using money as
A) a store of value. B) a unit of account.
C) a medium of exchange. D) a standard of deferred payment.
21) To be accepted as money, an item must perform all of the following functions EXCEPT
A) serve as a store of value.
B)
b
e easily reproduced.
C)
b
e a medium of exchange.
D) serve as a standard of deferred payment.
22) In economics, money is
A) another term for income.
B) a financial instrument backed by some precious metal such as gold or silver.
C) anything that people generally accept in exchange for goods and services.
D) whatever the government defines it to be.
23) When you set aside the money you have today in order to purchase goods and services later on,
you are using money as a
A) medium of exchange. B) standard of deferred payment.
C) unit of accounting. D) store of value.
24) The most important function of money is when money is used as a
A) medium of exchange. B) standard of deferred payment.
C) unit of accounting. D) store of value.
25) For something to serve as money, it must be
A)
b
acked by the authority of the government.
B) generally accepted by buyers and sellers.
C) light, durable, and common.
D) convertible to gold.
26) Which of the following is NOT one of the functions of money?
A) Medium of exchange B) Source of wealth
C) Unit of accounting D) Store of value
27) The function of money as a store of value diminishes if
A) prices of goods and services increase. B) interest rates increase.
C) people begin to barter. D) money is no longer backed by gold.
28) Which of the following statements is NOT true about money?
A) Anything that serves as a medium of exchange, as a unit of accounting, as a store of value,
and as a standard of deferred payment can be called money.
B) Money is any medium that is universally accepted by sellers and creditors.
C) Money is a standard of deferred payment.
D) Money can only be coins and paper.
29) A medium of exchange is
A) any asset that sellers will accept as payment.
B) a measure by which prices are expressed.
C) an asset that is used to settle future debts.
D) the thing traded when barter takes place.
30) Any asset that sellers will accept as payment is a(n)
A) medium of exchange. B) unit of accounting.
C) store of value. D) standard of deferred payment.
31) Without an accepted medium of exchange
A) there would be no trade.
B) people would have to rely on gold or silver in order to exchange goods and services.
C) goods and services would be exchanged by barter.
D) prices are very difficult to determine.
32) One of the benefits of money as a medium of exchange is that
A) it allows for private transactions such as trading vegetables for medical services.
B) it allows individuals to compare the relative value of goods.
C) over time it will become more valuable so that individuals can purchase more goods and
services.
D) it allows for specialization that leads to economic efficiencies.
33) The direct exchange of goods and services for other goods and services is known as
A) primitive trade. B) nonmarket trade.
C)
b
arter. D) purchasing power parity.
34) The direct exchange of goods and services for other goods and services without the use of
money is
A) a standard of deferred payment. B)
b
arter.
C) a store of value. D) financial intermediaries.
35) Which function of money allows people to specialize in areas in which they have a comparative
advantage?
A) Medium of exchange B) Unit of accounting
C) Store of value D) Standard of deferred payment
36) Compared to a barter economy, an economy that uses money will
A)
b
e greedier. B)
b
e poorer.
C) have more corruption. D) have more output.
37) Which of the following is NOT a benefit of money when used as a medium of exchange?
A) Allowing individuals to specialize
B) Allowing individuals to pay off debts
C) Allowing for some economic efficiencies
D) Providing economic growth
38) As a unit of account, money is used
A) to define prices of all other goods. B) to pay off future debts.
C) to hold purchasing power over time. D) to exchange for goods and services.
39) The function of money that allows individuals a method to compare the relative value of goods
and services is
A) medium of exchange. B) unit of accounting.
C) store of value. D) liquidity.
40) A measure by which prices are expressed is a(n)
A) medium of exchange. B) unit of accounting.
C) store of value. D) standard of deferred payment.
41) The function of money that provides for a commonly recognized measure of value for the price
system is a(n)
A) medium of exchange. B) unit of accounting.
C) store of value. D) standard of deferred payment.
42) Camels have been used as money. Which function of money would this type of money perform
least well?
A) Medium of exchange B) Unit of accounting
C) Store of value D) Standard of deferred payment
43) Which term below fits closest to money functioning as a unit of accounting?
A) Exchange B) Specialization C) Yardstick D) Liquid
44) Which function of money allows for comparison shopping?
A) Medium of exchange B) Unit of accounting
C) Store of value D) Standard of deferred payment
45) Money serves as a standard of value, which is another way of saying that money functions as
A) a medium of exchange. B) a unit of accounting.
C) a store of value. D) standard of deferred payment.
46) Cigarettes served as money in some prisoner of war (POW) camps during World War II. Given
this, we would expect to observe
A) no one ever smoking a cigarette.
B) people usually resorting to barter rather than using cigarettes as money.
C) prices of other goods expressed in terms of cigarettes.
D) only government issued cigarettes being accepted as money.
47) If something serves as a store of value, we expect it to be
A) divisible. B) durable.
C) of intrinsic value. D) light.
48) The ability to hold value over time is a(n)
A) medium of exchange. B) unit of accounting.
C) store of value. D) standard of deferred payment.
49) If something is to serve as money it must be a store of value. This means that it must
A)
b
e divisible.
B)
b
e the standard by which all goods are compared in setting prices.
C) hold its purchasing power over time.
D)
b
e liquid.
50) Money that we have today can be set aside to purchase things in the future. This function of
money is known as
A) medium of exchange. B) unit of accounting.
C) store of value. D) standard of deferred payment.
51) Money provides a way to transfer wealth into the future. This function of money is known as
A) medium of exchange. B) unit of accounting.
C) store of value. D) standard of deferred payment.
52) If lenders refuse to state the debt in terms of dollars, then dollars are not a
A) medium of exchange. B) unit of accounting.
C) store of value. D) standard of deferred payment.
53) The property of money that allows for the settling of debts that mature in the future is
A) liquidity. B) acceptability.
C) store of value. D) standard of deferred payment.
54) A property of an asset that makes it desirable for use as a means of settling debts maturing in
the future is a(n)
A) medium of exchange. B) unit of accounting.
C) store of value. D) standard of deferred payment.
55) What characteristic defines something as money?
A) assets declared by the government to be of value
B) a medium of exchange universally accepted in an economy
C) notes you can deposit in a savings account
D) an asset that earns interest
56) The requirement for a double coincidence of wants occurs when
A) there is inflation. B) there is deflation.
C) a system of barter is used. D) the medium of exchange is liquid.
57) To the extent that money serves as a store of value, it allows you to
A) transfer wealth into the future. B) comparison shop.
C)
b
e an effective negotiator. D) find good bargains.
58) To the extent that money serves as a medium of exchange
A) it benefits both buyers and sellers. B) it reduces transaction costs.
C) it eliminates the need for barter. D) All of the above are correct.
59) The advantage of holding money as an asset is that
A) money earns interest.
B) money is liquid.
C) money is safe from thievery.
D) the value of money appreciates over time.
60) The existence of money in an economy promotes efficiency by
A) creating an equal distribution of income.
B) creating incentives to be self sufficient.
C) facilitating trade, thereby allowing for greater specialization.
D) allowing for the formation of corporations as legal entities.
61) Which of the following is NOT a function of money?
A) medium of exchange B) form of credit
C) store of value D) standard of deferred payment
62) When comparing the price of a mountain bike with the price of a street bike, Sam discovered the
mountain bike was more expensive. This is an example of using money as
A) a store of value. B) a medium of exchange.
C) a unit of accounting. D) a standard of deferred payment.
63) If Joe buys a Mocha at Starbucks, his money is acting as a
A) unit of accounting. B) standard of deferred payment.
C) store of value. D) medium of exchange.
64) When Kate and Sam use dollars to compare the market values of their automobiles, money is
acting as a
A) unit of accounting. B) standard of deferred payment.
C) store of value. D) medium of exchange.
65) When Annie puts her money in her sock drawer for purchases later on, money is acting as a
A) unit of accounting. B) standard of deferred payment.
C) store of value. D) medium of exchange.
66) A monetary system is preferable over the barter system because of the problems associated with
A) cash leakages. B) the double coincidence of wants.
C) the law of diminishing marginal utility. D) the law of increasing relative costs.
67) A monetary system is preferable over the barter system because it
A) reduces transaction costs. B) is easier to track by the government.
C) limits cash leakages. D) is determined by the Congress.
68) The direct exchange of one good or service for another is called
A) a token exchange. B) a standard of deferred payment.
C) the exchange of purchasing power. D)
b
arter.
69) For barter to occur there has to be
A) a commodity to serve as a medium of exchange.
B) a formal market where prices are quoted.
C) a double coincidence of wants.
D) a single coincidence of wants.
70) A $100 price tag on a sweater in a department store is an example of money serving as a
A) medium of exchange. B) unit of accounting.
C) store of value. D) standard of deferred value.
71) Giving the store clerk a $100 bill for a sweater priced at $100 is an example of money serving as
a
A) medium of exchange. B) unit of accounting.
C) store of value. D) standard of deferred value.
72) If a friend of yours keeps cash hidden under the mattress, he is using money as a
A) medium of exchange. B) unit of accounting.
C) store of value. D) standard of deferred value.
73) You go to work today, but will get your paycheck at the end of the month. This is an example of
money serving as a
A) medium of exchange. B) unit of accounting.
C) store of value. D) standard of deferred payment.
74) Which of the following is NOT a function of money?
A) medium of stored value B) standard of deferred payment
C) unit of accounting D) store of value
75) The price tag on a pair of Nike shoes illustrates how money performs the function of a
A) medium of exchange. B) unit of accounting.
C) store of value. D) standard of deferred payment.
76) Perishable goods such as milk or fruit are never used as money, because they cannot function as
a
A) medium of exchange. B) unit of accounting.
C) store of value. D) standard of deferred payment.
77) Suppose you are offered a new iPod in exchange for thirty hours of your work in your friend s
garden. This is an example of
A) money as a medium of exchange.
B) money as a store of value.
C)
b
arter.
D) money as a standard of deferred payment.
78) Suppose you pay $490.00 for a new iPad. This is an example of
A) money as a medium of exchange.
B) money as a store of value.
C)
b
arter.
D) money as a standard of deferred payment.
79) What is money?
80) Why is money as a medium of exchange important in an economy?
81) What are the functions of money?
15.2 Properties of Money
1) Given the list of assets below, which is the most liquid?
A) $500 worth of General Motors common stock
B) $500 worth of General Motors bonds
C) A $500 travelers check
D) A one ounce gold coin
2) The degree to which an asset can be acquired or disposed of without much loss of nominal
value or transaction costs is known as
A) fiat money. B) liquidity. C) fiducia. D) credit.
3) An individual who desires the most liquid asset possible will hold
A) currency. B) a savings account.
C) checkable deposits at a bank. D) U.S. government bonds.
4) The ability to quickly convert an asset into cash is
A) disintermediation. B) the standard of deferred payment.
C) financial intermediation. D) liquidity.
5) When an asset is described as being highly liquid, which one of the following characteristics
does it possess?
A) It earns a high rate of interest, so its purchasing power is maintained when prices rise.
B) It is easily and readily converted into money without any loss in purchasing power.
C) The face value of the asset is somewhat less than its value when converted into currency.
D) The asset holds its value over time.
6) Liquidity refers to
A) the ease with which an asset can be acquired or disposed of without incurring high
transaction costs.
B) the expected return from an asset.
C) the amount of indebtedness held against an asset.
D) the net worth of the individual in question.
7) Which of the following is the most liquid asset?
A) small denomination time deposits B) currency
C) short term treasury bonds D) shares of stock
8) A highly liquid asset
A) has high transaction costs associated with its sale.
B) must be held for a substantial period of time.
C) generally has a very limited market for its resale.
D) can be disposed of easily without loss of value.
9) The cost of holding money is best described as
A) the cost of printing money.
B) the cost which price decreases impose on money holders.
C) the yield which is paid to money holders by the U.S. government.
D) the yield that could have been earned had the asset been held in another form.
10) A corporate bond is not as liquid as cash because the bond
A) cannot be converted to spendable dollars either until it matures or is sold to another
investor.
B) can be exchanged only for the goods or services produced by the company that issued the
bond.
C) must be exchanged for a stock certificate before it can be converted to spendable funds.
D) represents an exchange for gold only.
11) If an asset can be obtained or disposed of without much risk of losing its nominal value, it is
said to be
A) fiduciary. B) liquid. C) wealth. D) valuable.
12) The opportunity cost of holding money is measured by
A) a dollar.
B) the price of government bonds.
C) the interest yield that could have been earned by holding some other asset.
D) the liquidity of interest
b
earing assets.
13) The most liquid asset is
A) gold. B) silver.
C) money. D)
b
lue chip stocks.
14) The reason we are willing to accept money with no intrinsic value is that
A) paper currency may be exchanged for full
b
odied money.
B) the money supply is backed by an equal amount of gold and silver.
C) we have a fiduciary monetary system in which currency has both acceptability and
predictability of value.
D) the value of the money varies directly with changes in the price level.
15) In a fiduciary monetary system, the value of the money issued by a government is based on
A) the gold held in that government s vaults.
B) public confidence in that currency s acceptability and predictability of value.
C) the ability to convert it to some asset of value, like silver.
D) its being made out of some material with a market value equal to a bill s face value.
