ECO 316 Week 1 Chapter 2 Money and the Payments System

This document of ECO 316 Week 1 Chapter 2 Money and the Payments System shows the solutions to the following problems:

2.1 Multiple Choice Questions

1) Many economists argue that the gain to European countries from all of them using the same currency

2) The common currency in Europe is called the

3) When was the common European currency introduced?

4) Movements in the money supply are associated with

5) The most important reason why economies at an early stage of development tend to operate inefficiently is that

6) By “specialization” economists mean a situation where

7) The most important economic benefit from specialization is that it

8) When an economy relies on specialization,

9) Fundamentally, to reap the benefits of specialization, an economy must

10) Barter is

11) Under a system of barter

12) Which of the following is an example of a barter transaction?

13) In a barter system individuals

14) A system of barter has substantial transactions costs because

15) Under a barter system

16) How many prices would there be in a barter economy with 10 goods?

17) The problem of a double coincidence of wants refers to

18) Andy can’t make a deal with Danny. Andy has a Barry Bonds baseball card and would like to trade it to Danny for Danny’s Albert Pujols card, but Danny doesn’t want a Barry Bonds card. Andy’s problem illustrates the drawback to a barter system known as

19) Which of the following is NOT a significant cost that a barter system imposes on an economy?

20) The collapse of economic systems in Eastern Europe during the late 1980s reveals that

21) Which of the following is NOT true of allocating goods and services through a system of government rationing?

22) Which of the following is the most efficient means of trade?

23) Money eliminates the need for

24) Money is a medium of exchange in that

25) Money as a medium of exchange refers only to

26) Which of the following will lead to the most benefit in terms of greater prosperity?

27) Using a good as a medium of exchange confers the benefit that

28) When economists refer to the role of money as a unit of account, they mean that

29) When economists refer to the role of money as a store of value, they mean that

30) An asset is

31) The attribute that distinguishes money from other assets is that only money

32) Wealth is

33) The difference between money and income is that whereas income is an individual’s

34) Which of the following is NOT a stock?

35) In comparing money to shares of General Motors stock, we can say that

36) Why do individuals hold money when it does not provide the services that, say, a house does?

37) Other assets are inferior to money in the sense that

38) When economists refer to the role of money as a standard of deferred payment, they mean that

39) The purchasing power of money

40) When prices rise, the purchasing power of money

41) If the value of money increases over time, then we know

42) Suppose $100 buys less in the year 2007 than in 2000. Then we can say that

43) Eight cents earned in 1940 would have been able to buy goods and services worth how much today?

44) A hyperinflation occurs when

45) The experience of Argentina in the late 1980s illustrates the point that

46) A “price index” is a

47) Which of the following is NOT an important criterion for whether a good will be usable as a medium of exchange?

48) Which criterion for suitability as a medium of exchange do Federal Reserve Notes meet?

49) What determines the acceptability of dollar bills as a medium of exchange?

50) In what sense do self-fulfilling expectations determine the acceptability of a medium of exchange?

51) The payments system is

52) Definitive money

53) The simplest type of payments system is

54) Which of the following is an example of a commodity money?

55) All of the following are problems associated with commodity money EXCEPT

56) How was it possible for stamped and unstamped commodity money to circulate at the same time?

57) Fiat money

58) Which of the following is an example of fiat money?

59) What is a “central bank”?

60) If money is declared to be legal tender, it must be

61) By designating Federal Reserve currency as legal tender, the federal government

62) What is the most important factor for Federal Reserve currency to be accepted as money?

63) In the United States, the definitive money is

64) In Moscow in 1989, what were taxi drivers using as a medium of exchange?

65) In August 2006, what was the total value of Federal Reserve Notes in circulation?

66) Checks are

67) One advantage of using checks to settle transactions is

68) The use of checks in transactions

69) Automatic teller machines and debit cards are examples of

70) What do many economists blame for the severity of the Great Depression?

71) When economists refer to substitutability in discussing money, they are referring to

72) A monetary aggregate is a measure of

73) The narrowest money measure is

74) Which of the following is the largest measure of money?

75) Which of the following is NOT included in M1?

76) All of the following are examples of electronic funds EXCEPT

77) The M2 aggregate

78) Which of the following is NOT included in M2?

79) Which of the following statements is true about M2?

80) Which of the following are included in M1, but not in M2?

81) Money market deposit accounts are included in

82) Until the 1980s, most economists

83) The reason why many economists switched from using M1 to M2 as the best measure of the medium of exchange is that

84) The M1 and M2 aggregates

85) The Fed’s current position towards the existing monetary aggregates is

86) In 2006, the Fed stopped reporting data on which monetary aggregate?

87) Suppose the GDP implicit price deflator was 112.7 in 2005 and 116.0 in 2006. Therefore, the inflation rate in 2006 would be

88) The GDP implicit price deflator was 112.7 in 2005 and 116.0 in 2006. Therefore, the increase in the price level between the base year and 2006 was

2.2 Essay Questions

1) The American Civil War lasted from the spring of 1861 to the spring of 1865. During the war the Confederate government issued substantial amounts of fiat paper currency. What do you think happened to the price level (measured in Confederate dollars) in the Confederate states during the final months of the war?

2) Most economists believe that the adoption of the euro as the common currency of most countries in the European Community will result in significant economic gains to those countries. Discuss the nature of these economic gains.

3) What criteria should be used in deciding the best definition of the money supply?

4) 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.