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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.
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