G345 EXAM 1 QUESTIONS AND ANSWERS
money does what? - Answers - -makes exchange more efficient
-allows for specialization
why is barter inefficient? - Answers - transaction costs
voluntary trade may be sidestepped by using government allocation to distribute goods
and services, but... - Answers - this is likely to be unsuccessful because it ignores
market forces
four functions of money - Answers - 1. medium of exchange
2. unit of account
3. store of value
4. standard of deferred payment
medium of exchange - Answers - -anything that is generally accepted as payment for
goods and services or settlement of debt
-eliminates double coincidence of needs/reduces transaction costs
-must meet 5 requirements
unit of account - Answers - -a way of measuring value in the economy in terms of
money
-reduces transaction costs
store of value - Answers - money is an asset that can be owned and is therefore a
component of wealth
standard of deferred payment - Answers - money must also be acceptable to make
purchases today that will be paid in the future (credit transactions)
inflation - Answers - decline in purchasing power
deflation - Answers - increase in purchasing power
price index - Answers - summary stat that reflects changes in the price of a group of
goods and services relative to the price in the base year
use what to measure changes in the value of money? - Answers - price index
five criteria a good must meet to be suitable as a medium of exchange - Answers - -
acceptable to most traders
-standardized quality
-durable
, -divisible
-valuable relative to its weight
definitive money - Answers - money that does nto have to converted into a more basic
medium of exchange
commodity money - Answers - physical goods (gold, silver) to accomplish trade
fiat money system - Answers - money is authorized by central bank or governmental
body as legal tender
legal tender - Answers - money must be accepted to discharge debts and tax payments
must be in cash or checks denominated in that money
Federal Reserve Notes are - Answers - -fiat money
-no backing in gold
fiat money keeps its value by - Answers - being kept scare
who controls money supply? - Answers - FED/central bank
M1 - Answers - currency, demand deposits, traveler's checks, and other checkable
deposits
M2 - Answers - M1 +
small denomination time deposits + savings deposits and money market deposit
accounts + money market mutual fund shares.
M3 - Answers - M1 + M2 + less liquid assets (large-demonination time deposits,
institutional money market mutual fund balances, term repurchase agreements, and
eurodollars)
L - Answers - -broadest measure of money supply
-includes M1 M2 and M3 plus short term treasury securities, commercial paper, saving
bonds, and bankers' acceptances
specialization increases - Answers - -economic efficiency
-people create surpluses and need to trade
problem with barter - Answers - cannot easily match the highly specific needs of buyers
and sellers
problem with govt allocation - Answers - it misallocates resources
M1 and M2 reflect - Answers - money's role as a medium of exchange
money does what? - Answers - -makes exchange more efficient
-allows for specialization
why is barter inefficient? - Answers - transaction costs
voluntary trade may be sidestepped by using government allocation to distribute goods
and services, but... - Answers - this is likely to be unsuccessful because it ignores
market forces
four functions of money - Answers - 1. medium of exchange
2. unit of account
3. store of value
4. standard of deferred payment
medium of exchange - Answers - -anything that is generally accepted as payment for
goods and services or settlement of debt
-eliminates double coincidence of needs/reduces transaction costs
-must meet 5 requirements
unit of account - Answers - -a way of measuring value in the economy in terms of
money
-reduces transaction costs
store of value - Answers - money is an asset that can be owned and is therefore a
component of wealth
standard of deferred payment - Answers - money must also be acceptable to make
purchases today that will be paid in the future (credit transactions)
inflation - Answers - decline in purchasing power
deflation - Answers - increase in purchasing power
price index - Answers - summary stat that reflects changes in the price of a group of
goods and services relative to the price in the base year
use what to measure changes in the value of money? - Answers - price index
five criteria a good must meet to be suitable as a medium of exchange - Answers - -
acceptable to most traders
-standardized quality
-durable
, -divisible
-valuable relative to its weight
definitive money - Answers - money that does nto have to converted into a more basic
medium of exchange
commodity money - Answers - physical goods (gold, silver) to accomplish trade
fiat money system - Answers - money is authorized by central bank or governmental
body as legal tender
legal tender - Answers - money must be accepted to discharge debts and tax payments
must be in cash or checks denominated in that money
Federal Reserve Notes are - Answers - -fiat money
-no backing in gold
fiat money keeps its value by - Answers - being kept scare
who controls money supply? - Answers - FED/central bank
M1 - Answers - currency, demand deposits, traveler's checks, and other checkable
deposits
M2 - Answers - M1 +
small denomination time deposits + savings deposits and money market deposit
accounts + money market mutual fund shares.
M3 - Answers - M1 + M2 + less liquid assets (large-demonination time deposits,
institutional money market mutual fund balances, term repurchase agreements, and
eurodollars)
L - Answers - -broadest measure of money supply
-includes M1 M2 and M3 plus short term treasury securities, commercial paper, saving
bonds, and bankers' acceptances
specialization increases - Answers - -economic efficiency
-people create surpluses and need to trade
problem with barter - Answers - cannot easily match the highly specific needs of buyers
and sellers
problem with govt allocation - Answers - it misallocates resources
M1 and M2 reflect - Answers - money's role as a medium of exchange
