60. M1 is:
a. a more useful measure of the relationship between the money supply and inflation because it
includes the most liquid assets.
b. the money supply the Federal Reserve pays the most attention to in conducting monetary
policy.
c. less useful than M2 for understanding inflation.
d. the fastest growing of all of the money aggregates.
61. M1 has decreased in its usefulness in understanding inflation due to:
a. the increased use of checks in the economy.
b. the introduction of money market mutual fund shares and similar checking substitutes.
c. more reliance on the use of currency.
d. the increased use of electronic payments.
62. The introduction of money market substitutes for basic checking accounts was fueled
partially by the:
a. relatively high rates of inflation that existed in the late 1970s and early 1980s.
b. reluctance of many retailers to accept checks.
c. high number of bank failures that were occurring in the 1970s.
d. higher interest rates banks had to pay on checking accounts.
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63. A cross-country analysis of money growth supports the conclusion that:
a. there is no correlation between the growth rate of the quantity of money and the rate of
inflation.
b. the correlation between the money growth rate and inflation in most countries was positive but
very small.
c. the correlation between inflation and money growth in most industrialized countries was
actually negative.
d. the correlation between inflation and the money growth rate was positive and relatively
strong.
64. A cross-country analysis of money growth shows that the growth rate in the money supply was:
a. lower in countries with lower inflation rates.
b. higher in countries with lower inflation rates.
c. lower in countries with higher inflation rates.
d. the same whether the countries had high or low inflation rates.
65. The Consumer Price Index (CPI) is:
a. an example of an index that uses variable expenditure weights.
b. a fixed-expenditure-weight index used to measure changes in the GDP Deflator.
c. a fixed-expenditure weight-index used to measure changes in purchasing power for households.
d. the least commonly used measure of inflation.
66. The Consumer Price Index (CPI):
a. tends to understate the impact of price changes.
b. tends to overstate the impact of price changes due to substitution bias.
c. is more accurate than the GDP deflator.
d. assumes that consumers substitute away from cheaper goods.
67. The Consumer Price Index (CPI):
a. is calculated using a basket of goods and services adjusted annually by government statisticians.
b. answers the question, “How much more does it cost today to buy the same basket of goods and
services that were purchased at some fixed time in the past?”
c. does not suffer from substitution bias because the basket used to measure prices changes every year.
d. understates the impact of price changes.
68. Economists study the link between money and inflation because:
a. they want to understand how to keep inflation low and stable.
b. economists believe that inflation in the 3-6% range is healthy for an economy.
c. as prices increase money becomes more valuable.
d. the Fed needs to increase the money supply as prices increase.
69. Inflation refers to growth in the economy’s:
a. Gross Domestic Product (GDP).
b. interest rates.
c. money.
d. prices.
70. When the price level increases, the purchasing power of money:
a. increases by a similar amount.
b. stays the same since the purchasing power of money is not impacted by price levels.
c. decreases.
d. first increases and then decreases as people get used to higher prices.
71. The purchasing power of money:
a. rises when inflation rises.
b. decreases as the price level decreases.
c. decreases with inflation.
d. is not impacted by inflation, only by monetary policy.
72. Which of the following statements is incorrect?
a. If you can buy the same goods this year as you bought last year with less money there must
have been deflation.
b. If you can buy the same goods this year as you purchased one year ago with the same amount
of money, prices are stable.
c. If purchasing the same goods today that were purchased one year ago requires more money,
there must have been inflation.
d. If you can buy the same goods this year as you bought last year with the same money there
must have been deflation.
73. Which of the following statements is correct?
a. If you can buy the same goods this year as you bought last year with less money there must
have been inflation.
b. If purchasing the same goods today that were purchased one year ago requires more money,
there must have been deflation.
c. If purchasing the same goods today as one year ago requires less money, the money supply
likely decreased.
d. If purchasing the same goods today as one year ago requires less money, the money supply
likely increased.
74. The U.S. Treasury estimates that the fraction of U.S. currency held outside the United States
is:
a. about one-fourth.
b. about half.
c. between one-half and two-thirds.
d. less than 10%.
75. In countries with low inflation:
a. M2 growth is a very strong forecaster of inflation.
b. there tends to be a greater reliance on checks than electronic payments.
c. M2 growth is a poor forecaster of inflation.
d. money stocks are a larger percentage of GDP.
76. Sue uses a credit card to purchase a new pair of jeans. Sue is:
a. using money to buy her jeans since credit cards is money.
b. creating a liability that she will ultimately have to pay with money.
c. using an electronic payment form of money.
d. using a form of money included in M2.
77. The value of money as a means of payment:
a. is independent of changes in the amount of money in the economy.
b. is fixed once relative prices are set.
c. depends on the amount of money in the economy, among other things.
d. depends on whether the majority of M1 is in currency or demand deposits.
78. The primary concern of current critics of fiat money is that:
a. fiat money is too costly to produce.
b. governments issue too much money threatening its value.
c. fiat money is too easy to counterfeit.
d. government will issue too little threatening economic growth.
79. Current critics of fiat money are urging governments to do what?
a. Return to a system of legal tender.
b. Move to a system of electronic transactions only.
c. Return to a gold standard.
d. Place limits on the creation.
80. A policy is time consistent when:
a. policymakers have incentives to adhere to a policy decision made today, in the future.
b. policymakers have incentives to make policy decisions in a time-sensitive fashion.
c. policymakers consider the future when making current policies.
d. the timing of a policy is irrelevant.
Short Answer Questions
81. Consider the following: there are two countries, A and B. Each country has the same
resources, and produces the same goods. The residents of country A use money; the residents of
country B rely on bartering of goods. Will each country produce the same quantity of output?
Explain.
82. Consider an island where people use sand dollars (shells) as currency. For simplicity,
assume that people consume only one good: fish. Currently, there are 400 sand dollars in
circulation and there are 200 fish purchased each year. Based on this information, what is the
price of fish?
Now, suppose that a change in climate leads to new sand dollars washing ashore, leaving a total
of 500 sand dollars. If there are still 200 fish purchased each year, what is the new price of fish?
In order to prevent inflation, what would have to happen to the amount of fish purchased each
year?
83. What does it mean to say that an asset is “liquid”?
84. There are three goods produced in an economy by three individuals:
Good Producer
Oranges Orchard owner
Bread Baker
Chocolate Candy Maker
If the orchard owner likes only bread, the baker likes only chocolate, and the candy maker likes
only oranges, will any trade between these three persons take place in a barter economy?
Explain.
85. Many college campuses use student ID cards as a way for students to pay for on-campus
expenses, such as books, photocopies, and food. For convenience, some students will maintain a
balance on their ID cards. Are these balances a means of payment? Are they a store of value?
Explain why or why not.
86. Explain why the following statement is true, “money is an asset but not all assets are
money.”
87. Explain how money solves the problem of the “double coincidence of wants.”
88. Suppose there is an economy that has 100 people each of whom makes a different good, and
that they use a barter system for exchange. How many relative prices will there be?
89. Is the characteristic that distinguishes money from other assets its ability to be a store of
value?
90. What distinguishes commodity money from fiat money?
91. During the U.S. Civil War the Confederate government had to resort to printing currency to
obtain the goods they needed. Comment on what you think happened to both prices and the value
of this currency at the end of the war.
92. You purchase a good by writing a check for $1,000. Considering the financial payments
system this check follows, when is the check money? Explain.
93. Explain why credit cards are not considered money even though people seem to use them
like money.
94. Explain the difference(s) between a debit card and a credit card.
95. Rank the following assets from most liquid to least liquid.
a) Common stock
b) Houses
c) Currency
d) Art
e) Savings accounts
f) Checking account deposits.
96. During what period was money a better store of value: 1960-1980 or 1990-2009? Explain.
97. What is included in M2 that is not included in M1?
98. Have the growth rates of the two measures of money moved together over time? Explain.
99. How useful is M2 in tracking inflation? Explain.
100. Has M2 always been a useful tool for forecasting inflation? Explain.
101. Why do economists claim the Consumer Price Index (CPI) tends to overstate the actual rate
of inflation?
102. How has the Bureau of Labor Statistics (BLS) changed the calculation of the CPI in order
to take substitution bias into account?
103. What was the double liquidity shock that occurred in the US financial system in the
summer of 2007?
104. Why are electronic transactions increasingly taking the place of paper transactions?
Essay Questions
105. Consider two barter economies: Duos and Varietas. Duos produces two different goods,
whereas Varietas produces 80 different goods. Both countries have the same number of people.
In which barter economy is it more likely that the means of payment and the units of account
would be efficient? How many relative prices are there in Duos compared with Varietas? Which
economy would benefit more from adopting money?
106. After the Revolutionary War, the U.S. monetary system was based on gold. Historically,
why did the U.S. adopt the use of gold as a currency? How does this compare with the currency
used today?
107. Historically, some governments have relied on the revenue generated from printing
currenc
y
to finance government spending. Give two examples of government’s relying on paper
currenc
y
t
o
finance wartime expenditures. What do you expect happened to inflation rates during these
historical episodes?
108. In the chapter you read that it costs the U.S. Treasury‘s Bureau of Engraving and Printing
around 5 ½ cents to print a $1 bill, 10 ½ cents to print a $20 bill, and a bit over 14 cents to
print a $100 bill. It seems the Treasury could generate a nice profit for the government by
simply printing currency and using this currency to purchase the goods and services the
government needs. In fact, this seems to be a way to eliminate the problem of budget deficits
for the U.S. government. Comment on this idea.
109. A famous American has been visiting the same tropical island for 15 years for vacations.
When she goes she pays for everything by writing checks drawn on her U.S. bank. The currency
the natives use are not U.S. dollars; they use a currency called a fungo. The natives never cash
her checks. She is so well known on the island that the natives simply trade her checks among
themselves. The question you need to answer, complete with an explanation, is: who is paying
for her vacation? (You can assume her bank would honor the checks if presented for payment
even after a considerable period of time has passed.)