Money, Banking, and the Financial System (Hubbard/O’Brien)
Chapter 2 Money and the Payments System
2.1 Do We Need Money?
1) An important reason why economies at an early stage of development tend to operate
inefficiently is
A) they tend to be dominated by the agricultural sector, where productivity is usually low.
B) they tend to have authoritarian governments that stifle innovation.
C) they tend to be plagued by superstitious beliefs that stifle innovation.
D) the high transactions costs associated with barter.
2) By “specialization” economists mean a situation where
A) individuals produce the goods or services for which they have relatively the best ability.
B) goods are traded directly for goods and money is not used.
C) individuals who produce goods do not also produce services and individuals who produce
services do not also produce goods.
D) individuals are assigned to occupations on the basis of tests that gauge their relative abilities.
3) The most important economic benefit from specialization is that it
A) makes it possible for an economy to begin using money.
B) leads to an increase in the standard of living in an economy.
C) makes barter possible.
D) eliminates the need for financial markets.
4) When an economy relies on specialization,
A) the economy will generally produce only one product.
B) the economy will usually be heavily agricultural.
C) each individual in the economy produces the goods or services for which he or she has
relatively the best ability.
D) each individual will be assigned by the government to produce that good or service the
government believes the economy should specialize in.
5) Fundamentally, to reap the benefits of specialization, an economy must
A) be heavily industrial.
B) be heavily agricultural.
C) have an extensive system of higher education.
D) develop ways for individuals to trade goods with one another.
6) Barter is
A) another name for money.
B) an exchange of goods and services directly for goods and services.
C) the basis for economic specialization.
D) the main system of exchange in the United States today.
7) Under a system of barter
A) each individual trades output directly with another.
B) only agricultural goods may be traded.
C) goods may be traded for money, but money may not be traded for goods.
D) currency is accepted for purchases, but personal checks are not.
8) Which of the following is an example of a barter transaction?
A) An individual pays her electric bill with a check.
B) An individual pays her electric bill with currency.
C) An individual provides three light bulbs to her neighbor in exchange for two gallons of milk.
D) An individual deposits three twenty-dollar bills in her checking account.
9) In a barter system individuals
A) find it impossible to specialize.
B) must be entirely self-sufficient.
C) find it difficult to specialize, but may be able to do so.
D) will almost invariably specialize.
10) A system of barter has substantial transactions costs because
A) taxes under such a system are generally a large fraction of the value of output.
B) traders must spend considerable time searching for trading partners.
C) the uncertainties of trade result in high legal fees being incurred to draw up binding contracts.
D) the uncertainties of trade result in high insurance premiums.
11) Under a barter system
A) each good has many prices.
B) each good has a single price.
C) no prices for goods exist.
D) prices for goods are very stable.
12) How many prices would there be in a barter economy with 100 goods?
A) 100
B) 1,000
C) 4,950
D) 10,000
13) The problem of a double coincidence of wants refers to
A) the insatiability of wants in a free market economy.
B) poorly-managed companies producing what consumers want only by coincidence.
C) the necessity in a barter system of each trading partner wanting what the other has to trade.
D) the likelihood that needs will not be the same as wants.
14) Andy can’t make a deal with Danny. Andy has a Alex Rodriguez baseball card and would
like to trade it to Danny for Danny’s Albert Pujols card, but Danny doesn’t want a Alex
Rodriquez card. Andy’s problem illustrates the drawback to a barter system known as
A) the specialization problem.
B) the double coincidence of wants problem.
C) the many prices problem.
D) the transactions problem.
15) Which of the following is NOT a significant cost that a barter system imposes on an
economy?
A) Many prices must be maintained for each good.
B) Only agricultural goods may be traded.
C) Specialization of labor is hindered.
D) The costs arising from the problem of finding two people who each want what the other
produces.
16) Which of the following is the most efficient means of trade?
A) barter
B) money
C) government rationing
D) the combination of barter with some government rationing
17) In Moscow in 1989, what were taxi drivers using as a medium of exchange?
A) Russian rubles
B) Marlboro cigarettes
C) gold coins
D) caviar
18) Money eliminates the need for
A) any government role in the economy.
B) specialization.
C) people to have a double coincidence of wants.
D) the market system.
19) Using a good as a medium of exchange confers the benefit that
A) the need to quote so many prices in trade is reduced.
B) the need for a double coincidence of wants is greatly increased.
C) the need for specialization is reduced.
D) transactions costs are increased, but they now may be paid in money terms.
20) How does the existence of money affect economic growth?
21) What are four inefficiencies of a barter system?
2.2 The Key Functions of Money
1) Money is a medium of exchange in that
A) money is generally accepted for buying and selling goods and services.
B) currency may be exchanged for gold at any national bank.
C) other assets may be better or worse in facilitating exchange than money.
D) it must maintain most of its value over time.
2) Money as a medium of exchange refers only to
A) currency.
B) gold coins.
C) anything that is generally accepted as payment for goods and services.
D) checks at commercial banks.
3) When economists refer to the role of money as a unit of account, they mean that
A) most accounting systems reflect that goods are purchased with currency.
B) most accounting systems reflect that goods are purchased with checks.
C) money gives traders a way of measuring value in the economy.
D) money makes it possible for specialization to take place.
4) When economists refer to the role of money as a store of value, they mean that
A) money never loses its value, unlike other assets.
B) money allows value to be stored easily.
C) the value of money falls only when the quantity of money in circulation falls.
D) the value of money falls only when the quantity of money in circulation rises.
5) An asset is
A) the same thing as a liability.
B) a thing of value that can be owned.
C) money, as opposed to stock or bonds.
D) anything that never declines in value.
6) The attribute that distinguishes money from other assets is that only money
A) retains its value during times of inflation.
B) is counted in determining the size of an individual’s wealth.
C) serves as a medium of exchange.
D) may be used as collateral for a bank loan.
7) Wealth is
A) the sum of the value of assets.
B) equal to income.
C) a flow variable.
D) the sum of the value of assets minus value of liabilities.
8) The difference between money and income is that whereas income is an individual’s
A) flow of earnings over a period of time, money is an individual’s stock of currency and
currency substitutes.
B) stock of all assets, money is an individual’s stock of currency and currency substitutes.
C) flow of earnings over a period of time, money is an individual’s stock of all assets.
D) stock of currency and currency substitutes, money is an individual’s stock of all assets.
9) In comparing money to shares of Apple stock, we can say that
A) money is a store of value, but shares of Apple stock are not.
B) shares of Apple stock are a store of value, but money is not.
C) both money and shares of Apple stock are stores of value.
D) neither money nor shares of Apple stock are stores of value.
10) Why do individuals hold money when it does not provide the services that, say, a house
does?
A) Money is the most liquid asset.
B) Money is the only form in which wealth may be held.
C) Money increases in value faster than other assets.
D) Money is useful in avoiding taxes on certain transactions.
11) Other assets are inferior to money in the sense that
A) they increase in value more slowly than does money.
B) they have a lower overall return than money.
C) they are more vulnerable to losing their real value as inflation increases.
D) they generate transactions costs when they are exchanged for money.
12) When economists refer to the role of money as a standard of deferred payment, they mean
that
A) payments by checks are usually deferred until the checks clear the bank.
B) money earns interest while loan payments are deferred.
C) money provides a standard for payments that will occur in the future.
D) money today is worth less than money tomorrow.
13) If prices increase rapidly
A) money’s usefulness as a store of value is diminished.
B) money increases in value.
C) deflation is likely.
D) prices will decline to their normal level.
14) Suppose $100 buys less in the year 2011 than in 2000. Then we can say that
A) money’s store of value has decreased.
B) money’s store of value has increased.
C) the economy must have been growing rapidly between 2000 and 2011.
D) the economy must have been growing slowly between 2000 and 2011.
15) Which of the following is NOT an important criterion for whether a good will be usable as a
medium of exchange?
A) The good must be of standardized quality.
B) The good must be valuable relative to its weight.
C) The good must have value even if it were not being used as money.
D) The good must be durable so that value is not lost through product spoilage.
16) Which criterion for suitability as a medium of exchange do Federal Reserve Notes meet?
A) They are of standardized quality.
B) They are durable.
C) They are acceptable to most traders.
D) Federal Reserve Notes meet all of the criteria for suitability as a medium of exchange.
17) What determines the acceptability of dollar bills as a medium of exchange?
A) Our society’s willingness to use green paper notes issued by the Federal Reserve as money.
B) The willingness of the Federal Reserve to redeem dollar bills for gold.
C) The willingness of the U.S. Treasury to redeem dollar bills for gold.
D) The public’s fear that failing to accept dollar bills will trigger a hyperinflation.
18) In what sense do self-fulfilling expectations determine the acceptability of a medium of
exchange?
A) People like to do what the government expects them to do.
B) People value something as money only if they believe others will accept it from them as
payment.
C) People expect that money will never lose its value.
D) People expect that eventually every country will use the same medium of exchange.
19) Fiat money
A) is money that would have no value if it were not usable as money.
B) is illegal in most advanced, industrial countries.
C) is usually some type of precious metal.
D) will generally be accepted in trade for less than its face value.
20) If money is declared to be legal tender, it must be
A) minted from a precious metal.
B) acceptable to citizens of foreign countries.
C) possible to exchange it for an equivalent amount of precious metal.
D) accepted to settle private transactions and it must be used in paying taxes.
21) By designating Federal Reserve currency as legal tender, the federal government
A) has ensured that Federal Reserve currency will serve as money.
B) has guaranteed that Federal Reserve currency may be exchanged for an equivalent amount of
gold or silver.
C) has mandated that Federal Reserve currency be accepted for payment of debts.
D) has mandated that Federal Reserve currency be accepted by citizens of foreign countries in
exchange for their countries’ currencies.
22) What is the most important factor for Federal Reserve currency to be accepted as money?
A) Its acceptance by businesses and households in the United States in exchange for goods and
services.
B) Its designation as legal tender by the federal government.
C) The willingness of the federal government to accept it in exchange for an equivalent amount
of gold or silver coins.
D) The willingness of foreign businesses and banks to accept it in exchange for goods and
services.
23) If fiat money has no value apart from its use as money, how can it be used as a medium of
exchange?
24) Economic studies have shown that countries that have high inflation rates have lower rates of
economic growth than do countries with low inflation rates. Explain what underlies this
relationship between inflation and economic growth.
25) In what way are other assets less liquid than money?
26) What is the difference between money, income, and wealth?
27) What are the five characteristics that make an asset suitable to be used as a medium of
exchange?
2.3 The Payments System
1) The payments system is
A) the mechanism for conducting economic transactions.
B) another name for the system of foreign exchange rates.
C) the phrase used to describe how transactions are carried out in an economy that does not use
money.
D) the way in which economic transactions are carried out in a government-controlled economy,
such as the former Soviet Union.
2) Which of the following is an example of a commodity money?
A) gold coins
B) dollar bills
C) British pound notes
D) Japanese yen notes
3) All of the following are problems associated with commodity money EXCEPT
A) it is a cumbersome form of payments system.
B) commodities tend to have little value in and of themselves.
C) its value is dependent on its purity.
D) costs are incurred in certifying the purity and weight of commodity money.