Money And Banking [ch. 3]

Money is generally accepted as a medium of exchange for goods and services, or as a means of repayment for debt. It is a universally recognized form of payment that facilitates economic transactions. Therefore, the statement that money is anything generally accepted in payment for goods and services or in the repayment of debt is true.

The explanation for the given correct answer is that the Federal Reserve (Fed) should not be overly concerned with short-term fluctuations in the money supply because there are various factors that can lead to significant revisions in the monetary aggregates. One such factor is the infrequent reporting of deposits by small depository institutions, which can cause fluctuations in the reported money supply. Additionally, seasonal variations in the data can also lead to revisions as new information becomes available. Therefore, it is more important for the Fed to focus on long-term trends and overall stability in the money supply rather than reacting to short-term movements.

The explanation for the given answer is that the time and high cost associated with transporting and processing checks have led to a shift towards electronic payment methods. This is because electronic payments are faster and more cost-effective compared to traditional check payments. As a result, many individuals and businesses are opting for electronic payment options, such as credit cards, online banking, and mobile payment apps, to streamline their financial transactions.

Barter refers to the direct exchange of goods or services without the use of money. The statement is true because in a barter system, both parties involved in the exchange must have a mutual desire for the goods or services being offered. This means that there needs to be a "double coincidence of wants" for the exchange to occur. For example, if person A has wheat and wants milk, but person B has milk and wants rice, a direct exchange cannot take place. This lack of divisibility and difficulty in finding a suitable trading partner makes barter inefficient compared to using a common medium of exchange like money.

Money serves as a medium of exchange, which means it can be used to buy goods and services. This function of money distinguishes it from other assets, such as stocks or real estate, which cannot be easily exchanged for goods and services. Money's role as a medium of exchange allows for the smooth facilitation of transactions in an economy, making it an essential function of money. Therefore, the given answer, "True," is correct.

Money is considered the most liquid store of value in the economy because it can easily be converted into goods, services, or other assets. Unlike other forms of value storage such as real estate or stocks, money can be readily used for transactions and is widely accepted as a medium of exchange. It is highly liquid because it can be easily accessed and spent, making it a convenient and efficient store of value for individuals and businesses.

The statement is true because M1 refers to the narrowest definition of money supply, which includes only the most liquid financial assets. These assets are easily convertible into cash and can be used for transactions immediately. Examples of assets included in M1 are physical currency (coins and notes) and demand deposits in banks, such as checking accounts. By stating that M1 contains only perfectly liquid financial assets, it means that it includes only those assets that can be readily used as a medium of exchange.

Barter is an inefficient system because it requires establishing the value of each good in terms of all other goods. This means that there would need to be a vast number of prices for each good, making the process complex and time-consuming. Therefore, the statement that "Barer is inefficient because barter requires an enormous number of prices for each good to be valued in terms of all other goods" is true.

A barter economy has the least efficient payments system because it relies on the direct exchange of goods and services without the use of a common medium of exchange. In a barter system, individuals have to find someone who has what they want and is willing to accept what they have in exchange. This can be time-consuming and inefficient compared to using a standardized form of money. In contrast, other economies mentioned in the options have more efficient payments systems as they use currency, deposit money, or fiat money, which facilitate easier and more convenient transactions.

The statement is not entirely accurate. While income does involve money, it is not the same thing as money. Income refers to the amount of money a person earns from various sources such as salary, investments, or business profits. Therefore, someone can have a high income without necessarily having a lot of money, as they may have expenses or debts that reduce their overall wealth.

Money serves as a store of value, medium of exchange, and unit of account. However, it does not directly provide protection against inflation. While money can be used to invest in assets that may act as a hedge against inflation, such as stocks or real estate, the primary purpose of money is not to protect against inflation itself. Its main functions are to facilitate transactions, measure value, and retain purchasing power over time.

A five dollar bill is an example of fiat money because it is not backed by a physical commodity like gold or silver. Fiat money has value because the government declares it as legal tender and people accept it as a medium of exchange. In this case, the five dollar bill has value because the government has designated it as legal currency and people trust that it can be used to make purchases and settle debts.

Savings deposits are not included in the monetary aggregate known as M1. M1 includes only the most liquid forms of money, such as physical currency and demand deposits (checking accounts). Savings deposits are considered less liquid as they typically have restrictions on the number of withdrawals and may earn interest. Therefore, they are not included in M1, but rather in broader measures of money supply, such as M2 or M3.

During inflationary times, the value of money tends to decrease as the prices of goods and services rise. This means that money is not an excellent store of value during inflationary times. Instead, other assets like real estate, stocks, or commodities may be better options for preserving value. Therefore, the correct answer is false.

The statement suggests that the Fed rarely revises its first estimates of the monetary aggregates because they are usually accurate. However, the given answer is "False," indicating that the statement is not true. Therefore, it can be inferred that the Fed does revise its first estimates of the monetary aggregates, implying that their initial estimates are not always accurate.

Income is measured as a flow per unit of time because it represents the amount of money earned by an individual or a business over a specific period, such as monthly or annually. Money and wealth, on the other hand, are not necessarily measured per unit of time as they can refer to a specific amount or value at a given point in time. Therefore, the correct answer is income.

An asset with great liquidity is one that can be easily and quickly converted into a medium of exchange. This means that it can be readily traded or sold for cash or other assets without incurring significant costs or delays. Liquidity is an important characteristic for an asset as it allows for flexibility and ease of transactions. Therefore, the correct answer is that an asset with great liquidity can be converted into a medium of exchange with relative ease and speed.

The scenario demonstrates the function of money as a medium of exchange. John is able to specialize as a medical doctor and earn money, which he can then use to buy all the things he needs. Money serves as a medium of exchange by allowing John to trade his medical services for goods and services from others.

In a barter economy, goods and services are directly traded for other goods and services without the use of money. This means that individuals exchange their goods or services for what they need or want, without the need for a medium of exchange like gold, fiat money, or currency and deposit money. In this type of economy, there is a direct exchange of goods and services between individuals, based on their needs and preferences.

The statement suggests that fiat money evolved into commodity money because commodity money is less likely to be stolen and easier to transport. However, this is not true. Fiat money is a type of currency that is not backed by a physical commodity, while commodity money is a type of currency that has intrinsic value, such as gold or silver. Fiat money did not evolve into commodity money; rather, commodity money was used before the introduction of fiat money. The statement is therefore false.

Commodity money refers to physical objects that have value in themselves, such as gold or silver. Using commodity money as a form of payment can be least efficient because it involves additional transaction costs. These costs include the need to physically transport and secure the commodity money, as well as the costs associated with verifying its authenticity and determining its value. In contrast, other forms of payment like checks, fiat money, and electronic payments are more efficient as they involve less physical handling and can be easily transferred electronically, resulting in lower transaction costs.

Checkable deposits are included in both M1 and M2 monetary aggregates. M1 includes only the most liquid forms of money, such as physical currency and checkable deposits, which can be easily accessed and used for transactions. M2, on the other hand, includes all components of M1 plus additional forms of less liquid money, such as savings deposits and small time deposits. Therefore, since checkable deposits are included in both M1 and M2, the correct answer is M1 and M2.

The assets in M1 are more liquid than the assets in M2 because M1 includes currency, demand deposits, and other highly liquid assets that can be easily converted into cash or used for transactions. M2 includes M1 plus savings deposits, time deposits, and other less liquid assets that may have restrictions on withdrawal or require more time to convert into cash. Therefore, M1 assets are more readily available for immediate use and are considered to have higher liquidity compared to M2 assets.

Cigarettes in a POW camp are an example of commodity money because they serve as a medium of exchange and have intrinsic value. In this scenario, cigarettes are used as a form of currency among the prisoners of war, and they hold value due to their scarcity and demand within the camp. Unlike the other options listed, cigarettes can be directly used for transactions without the need for conversion or reliance on a centralized authority.

Fiat money is not redeemable into a particular precious metal such as gold. This means that unlike commodity money, which can be exchanged for a specific amount of gold or another precious metal, fiat money has no intrinsic value and its value is determined by government decree.

Large-denomination time deposits are not included in M2. M2 is a measure of the money supply that includes currency, savings deposits, and small-denomination time deposits. Large-denomination time deposits refer to deposits with high minimum balance requirements and longer maturity periods, typically held by institutional investors and wealthy individuals. Since they are not considered part of the broader money supply available for circulation and spending, they are not included in M2.

When prices are rising rapidly, money loses its value over time, making it a poor store of value. In such situations, people tend to lose confidence in holding money as a means of preserving their wealth. Instead, they may look for alternative assets or investments that can retain their value better. Therefore, money is not considered a good store of value during periods of rapid inflation or price increases.

Money market deposit accounts are not included in the M1 monetary aggregate. M1 includes currency, demand deposits, NOW accounts, and traveler's checks. Money market deposit accounts are a type of savings account that typically offers higher interest rates than regular savings accounts and allows limited check-writing privileges. While they are a part of the broader money supply, they are not considered part of the M1 aggregate because they are less liquid and not as readily available for transactions as the other components of M1.

A payments system based on money is more efficient than a barter economy because transactions costs are lower and fewer prices are needed to establish relative values between all commodities. Money acts as a medium of exchange, making it easier to facilitate transactions and reduce the time and effort required for bartering. Additionally, by using money, individuals can assign a specific value to each commodity, allowing for easier comparison and exchange. Therefore, both options (a) and (b) are correct in explaining the efficiency of a money-based payments system compared to a barter economy.

The Fed is more concerned with long-run movements in the monetary aggregates rather than the short-run movements. This means that the Federal Reserve is more focused on the overall trends and changes in the money supply over a longer period of time, rather than short-term fluctuations. This is because long-run movements in the monetary aggregates can have a more significant impact on the economy as a whole, while short-run movements may be temporary and not indicative of broader economic trends.

An effective commodity money should not be easily reproduced by everyone in the economy. This is because if everyone can easily reproduce the money, it would lead to inflation and devalue the currency. The value of the money is maintained by its scarcity, so if it can be easily reproduced, it would lose its value as a medium of exchange.

In a barter economy, goods are exchanged directly for other goods, which means that there is no need for any form of currency or medium of exchange. This eliminates the need for transaction costs such as fees or commissions that are typically associated with monetary transactions. Therefore, barter economies do not generate transaction costs, making the given answer correct.

A credit card is not an example of electronic money because it does not hold a stored value that can be used for transactions. Unlike debit cards, stored-value cards, and smart cards, which can be loaded with a specific amount of money, a credit card allows the user to borrow money from the issuing bank to make purchases. The user then needs to repay the borrowed amount later, along with any applicable interest charges.

Fiat money is not backed by a particular precious metal. It is a currency that is declared legal tender by the government, but its value is not directly linked to any physical commodity. Instead, its value is based on the trust and confidence of the people who use it. Therefore, the statement that fiat money is guaranteed to redeem in terms of a particular precious metal is false.

The explanation for the answer "False" is that policy makers cannot use either M1 or M2 as a guide for monetary policy and expect the same results because the movements of these monetary aggregates do not always closely track each other. M1 includes only the most liquid forms of money such as cash and checking account deposits, while M2 includes M1 plus less liquid forms of money such as savings account deposits and small time deposits. The composition and behavior of these aggregates can differ, leading to different implications for monetary policy.