Economics Of Money Banking And Financial Markets 10th Edition by Mishkin – Test bank
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Economics of Money, Banking, and Fin. Markets, 10e (Mishkin)
Chapter 3 What Is Money?
3.1 Meaning of Money
1) To an economist, ________ is anything that is generally
accepted in payment for goods and services or in the repayment of debt.
1. A)
wealth
2. B)
income
3. C)
money
4. D)
credit
Answer: C
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2) Money is
1. A)
anything that is generally accepted in payment for goods and services or in the
repayment of debt.
2. B) a
flow of earnings per unit of time.
3. C)
the total collection of pieces of property that are a store of value.
4. D)
always based on a precious metal like gold or silver.
Answer: A
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3) Currency includes
1. A)
paper money and coins.
2. B)
paper money, coins, and checks.
3. C)
paper money and checks.
4. D)
paper money, coins, checks, and savings deposits.
Answer: A
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4) Even economists have no single, precise definition of money
because
1. A)
money supply statistics are a state secret.
2. B)
the Federal Reserve does not employ or report different measures of the money
supply.
3. C)
the “moneyness” or liquidity of an asset is a matter of degree.
4. D)
economists find disagreement interesting and refuse to agree for ideological
reasons.
Answer: C
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5) The total collection of pieces of property that serve to
store value is a person’s
1. A)
wealth.
2. B)
income.
3. C)
money.
4. D)
credit.
Answer: A
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6) A person’s house is part of her
1. A)
money.
2. B)
income.
3. C)
liabilities.
4. D)
wealth.
Answer: D
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7) ________ is used to make purchases while ________ is the
total collection of pieces of property that serve to store value.
1. A)
Money; income
2. B)
Wealth; income
3. C)
Income; money
4. D)
Money; wealth
Answer: D
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8) ________ is a flow of earnings per unit of time.
1. A)
Income
2. B)
Money
3. C)
Wealth
4. D)
Currency
Answer: A
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9) An individual’s annual salary is her
1. A)
money.
2. B)
income.
3. C)
wealth.
4. D) liabilities.
Answer: B
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10) When we say that money is a stock variable, we mean that
1. A)
the quantity of money is measured at a given point in time.
2. B) we
must attach a time period to the measure.
3. C) it
is sold in the equity market.
4. D)
money never loses purchasing power.
Answer: A
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11) The difference between money and income is that
1. A)
money is a flow and income is a stock.
2. B)
money is a stock and income is a flow.
3. C)
there is no difference—money and income are both stocks.
4. D)
there is no difference—money and income are both flows.
Answer: B
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12) Which of the following is a true statement?
1. A)
Money and income are flow variables.
2. B)
Money is a flow variable.
3. C)
Income is a flow variable.
4. D)
Money and income are stock variables.
Answer: C
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13) Which of the following statements uses the economists’
definition of money?
1. A) I
plan to earn a lot of money over the summer.
2. B)
Betsy is rich—she has a lot of money.
3. C) I
hope that I have enough money to buy my lunch today.
4. D)
The job with New Company gave me the opportunity to earn more money.
Answer: C
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3.2 Functions of Money
1) Of money’s three functions, the one that distinguishes money
from other assets is its function as a
1. A)
store of value.
2. B)
unit of account.
3. C)
standard of deferred payment.
4. D)
medium of exchange.
Answer: D
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2) If peanuts serve as a medium of exchange, a unit of account,
and a store of value, then peanuts are
1. A)
bank deposits.
2. B)
reserves.
3. C)
money.
4. D)
loanable funds.
Answer: C
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3) ________ are the time and resources spent trying to exchange
goods and services.
1. A)
Bargaining costs.
2. B) Transaction
costs.
3. C)
Contracting costs.
4. D)
Barter costs.
Answer: B
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4) Compared to an economy that uses a medium of exchange, in a
barter economy
1. A)
transaction costs are higher.
2. B)
transaction costs are lower.
3. C)
liquidity costs are higher.
4. D)
liquidity costs are lower.
Answer: A
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5) When compared to exchange systems that rely on money,
disadvantages of the barter system include:
1. A)
the requirement of a double coincidence of wants.
2. B)
lowering the cost of exchanging goods over time.
3. C)
lowering the cost of exchange to those who would specialize.
4. D)
encouraging specialization and the division of labor.
Answer: A
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6) The conversion of a barter economy to one that uses money
1. A)
increases efficiency by reducing the need to exchange goods and services.
2. B)
increases efficiency by reducing the need to specialize.
3. C)
increases efficiency by reducing transactions costs.
4. D)
does not increase economic efficiency.
Answer: C
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7) Which of the following statements best explains how the use
of money in an economy increases economic efficiency?
1. A)
Money increases economic efficiency because it is costless to produce.
2. B)
Money increases economic efficiency because it discourages specialization.
3. C)
Money increases economic efficiency because it decreases transactions costs.
4. D) Money
cannot have an effect on economic efficiency.
Answer: C
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8) When economists say that money promotes ________, they mean
that money encourages specialization and the division of labor.
1. A)
bargaining
2. B)
contracting
3. C)
efficiency
4. D)
greed
Answer: C
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9) Money ________ transaction costs, allowing people to
specialize in what they do best.
1. A)
reduces
2. B)
increases
3. C) enhances
4. D)
eliminates
Answer: A
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10) For a commodity to function effectively as money it must be
1. A)
easily standardized, making it easy to ascertain its value.
2. B)
difficult to make change.
3. C)
deteriorate quickly so that its supply does not become too large.
4. D)
hard to carry around.
Answer: A
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11) All of the following are necessary criteria for a commodity
to function as money except
1. A) it
must deteriorate quickly.
2. B) it
must be divisible.
3. C) it
must be easy to carry.
4. D) it
must be widely accepted.
Answer: A
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12) Whatever a society uses as money, the distinguishing
characteristic is that it must
1. A) be
completely inflation proof.
2. B) be
generally acceptable as payment for goods and services or in the repayment of
debt.
3. C)
contain gold.
4. D) be
produced by the government.
Answer: B
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13) All but the most primitive societies use money as a medium
of exchange, implying that
1. A)
the use of money is economically efficient.
2. B)
barter exchange is economically efficient.
3. C)
barter exchange cannot work outside the family.
4. D)
inflation is not a concern.
Answer: A
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14) Kevin purchasing concert tickets with his debit card is an
example of the ________ function of money.
1. A)
medium of exchange
2. B)
unit of account
3. C)
store of value
4. D)
specialization
Answer: A
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15) When money prices are used to facilitate comparisons of
value, money is said to function as a
1. A)
unit of account.
2. B)
medium of exchange.
3. C)
store of value.
4. D)
payments-system ruler.
Answer: A
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16) A problem with barter exchange when there are many goods is
that in a barter system
1. A)
transactions costs are minimized.
2. B)
there exists a multiple number of prices for each good.
3. C)
there is only one store of value.
4. D)
exchange of services is impossible.
Answer: B
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17) In a barter economy the number of prices in an economy with
N goods is
2. A)
[N(N – 1)]/2.
3. B) N(N/2).
4. C)
2N.
5. D)
N(N/2) – 1.
Answer: A
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18) If there are five goods in a barter economy, one needs to
know ten prices in order to exchange one good for another. If, however, there
are ten goods in a barter economy, then one needs to know ________ prices in
order to exchange one good for another.
1. A) 20
2. B) 25
3. C) 30
4. D) 45
Answer: D
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19) If there are four goods in a barter economy, then one needs
to know ________ prices in order to exchange one good for another.
1. A) 8
2. B) 6
3. C) 5
4. D) 4
Answer: B
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20) Because it is a unit of account, money
1. A)
increases transaction costs.
2. B)
reduces the number of prices that need to be calculated.
3. C)
does not earn interest.
4. D)
discourages specialization.
Answer: B
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21) Dennis notices that jackets are on sale for $99. In
this case money is functioning as a
1. A)
medium of exchange.
2. B)
unit of account.
3. C)
store of value.
4. D)
payments-system ruler.
Answer: B
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22) As a store of value, money
1. A)
does not earn interest.
2. B)
cannot be a durable asset.
3. C)
must be currency.
4. D) is
a way of saving for future purchases.
Answer: D
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23) Patrick places his pocket change into his savings bank on
his desk each evening. By his actions, Patrick indicates that he believes
that money is a
1. A)
medium of exchange.
2. B)
unit of account.
3. C)
store of value.
4. D)
unit of specialization.
Answer: C
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24) ________ is the relative ease and speed with which an asset
can be converted into a medium of exchange.
1. A)
Efficiency
2. B)
Liquidity
3. C)
Deflation
4. D)
Specialization
Answer: B
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25) Increasing transactions costs of selling an asset make the
asset
1. A)
more valuable.
2. B)
more liquid.
3. C)
less liquid.
4. D)
more moneylike.
Answer: C
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26) Since it does not have to be converted into anything else to
make purchases, ________ is the most liquid asset.
1. A)
money
2. B)
stock
3. C)
artwork
4. D)
gold
Answer: A
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27) Of the following assets, the least liquid is
1. A)
stocks.
2. B)
traveler’s checks.
3. C)
checking deposits.
4. D) a
house.
Answer: D
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28) Ranking assets from most liquid to least liquid, the correct
order is
1. A)
savings bonds; house; currency.
2. B)
currency; savings bonds; house.
3. C)
currency; house; savings bonds.
4. D)
house; savings bonds; currency.
Answer: B
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29) People hold money even during inflationary episodes when
other assets prove to be better stores of value. This can be explained by the
fact that money is
1. A)
extremely liquid.
2. B) a
unique good for which there are no substitutes.
3. C)
the only thing accepted in economic exchange.
4. D)
backed by gold.
Answer: A
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30) If the price level doubles, the value of money
1. A)
doubles.
2. B)
more than doubles, due to scale economies.
3. C)
rises but does not double, due to diminishing returns.
4. D)
falls by 50 percent.
Answer: D
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31) A fall in the level of prices
1. A)
does not affect the value of money.
2. B)
has an uncertain effect on the value of money.
3. C)
increases the value of money.
4. D)
reduces the value of money.
Answer: C
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32) A hyperinflation is
1. A) a
period of extreme inflation generally greater than 50% per month.
2. B) a
period of anxiety caused by rising prices.
3. C) an
increase in output caused by higher prices.
4. D)
impossible today because of tighter regulations.
Answer: A
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33) During hyperinflations,
1. A)
the value of money rises rapidly.
2. B)
money no longer functions as a good store of value and people may resort to
barter transactions on a much larger scale.
3. C)
middle-class savers benefit as prices rise.
4. D)
money’s value remains fixed to the price level; that is, if prices double so
does the value of money.
Answer: B
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34) Because inflation in Germany after World War I sometimes
exceeded 1,000 % per month, one can conclude that the German economy suffered
from
1. A)
deflation.
2. B)
disinflation.
3. C)
hyperinflation.
4. D)
superdeflation.
Answer: C
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35) If merchants in the country Zed choose to close their doors,
preferring to be stuck with rotting merchandise rather than worthless currency,
then one can conclude that Zed is experiencing a
1. A)
superdeflation.
2. B)
hyperdeflation.
3. C)
disinflation.
4. D)
hyperinflation.
Answer: D
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36) Explain how cigarettes could be called “money” in
prisoner-of-war camps of World War II.
Answer: The cigarettes performed the three functions of
money. They served as the medium of exchange because individuals did exchange
items for cigarettes. They served as a unit of account because prices were
quoted in terms of the number of cigarettes required for the exchange. They
served as a store of value because an individual would be willing to save their
cigarettes even if they did not smoke because they believed that they could
exchange the cigarettes for something that they did want at some time in the
future.
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3.3 Evolution of the Payments System
1) The payments system is
1. A)
the method of conducting transactions in the economy.
2. B)
used by union officials to set salary caps.
3. C) an
illegal method of rewarding contracts.
4. D)
used by your employer to determine salary increases.
Answer: A
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2) As the payments system evolves from barter to a monetary
system,
1. A)
commodity money is likely to precede the use of paper currency.
2. B)
transaction costs increase.
3. C)
the number of prices that need to be calculated increase rather dramatically.
4. D)
specialization decreases.
Answer: A
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3) ________ money could be used for some other purpose other
than as a medium of exchange, for example, gold coins could be melted down and
turned into gold jewelry.
1. A)
Commodity
2. B)
Fiat
3. C)
Paper
4. D)
Electronic
Answer: A
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4) A disadvantage of ________made from precious metals is that
it is very heavy and hard to transport from one place to another.
1. A)
commodity money
2. B)
fiat money
3. C)
electronic money
4. D)
paper money
Answer: A
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5) Paper currency that has been declared legal tender but is not
convertible into coins or precious metals is called ________ money.
1. A)
commodity
2. B)
fiat
3. C)
electronic
4. D)
funny
Answer: B
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6) When paper currency is decreed by governments as legal
tender, legally it must be
1. A)
paper currency backed by gold.
2. B) a
precious metal such as gold or silver.
3. C)
accepted as payment for debts.
4. D)
convertible into an electronic payment.
Answer: C
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7) The evolution of the payments system from barter to precious
metals, then to fiat money, then to checks can best be understood as a
consequence of the fact that
1. A)
paper is more costly to produce than precious metals.
2. B)
precious metals were not generally acceptable.
3. C)
precious metals were difficult to carry and transport.
4. D)
paper money is less accepted than checks.
Answer: C
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8) Compared to checks, paper currency and coins have the major
drawbacks that they
1. A)
are easily stolen.
2. B)
are hard to counterfeit.
3. C)
are not the most liquid assets.
4. D)
must be backed by gold.
Answer: A
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9) Although ________ currency is lighter than coins made of
metals, a disadvantage arising from modern technology is the ease of ________.
1. A)
paper; transport
2. B)
commodity; counterfeiting
3. C)
fiat; transport
4. D)
paper; counterfeiting
Answer: D
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10) Introduction of checks into the payments system reduced the
costs of exchanging goods and services. Another advantage of checks is
that
1. A)
they provide convenient receipts for purchases.
2. B)
they can never be stolen.
3. C)
they are more widely accepted than currency.
4. D)
the funds from a deposited check are available for use immediately.
Answer: A
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11) The evolution of the payments system from barter to precious
metals, then to fiat money, then to checks can best be understood as a
consequence of
1. A)
government regulations designed to improve the efficiency of the payments
system.
2. B)
government regulations designed to promote the safety of the payments system.
3. C) innovations
that reduced the costs of exchanging goods and services.
4. D)
competition among firms to make it easier for customers to purchase their
products.
Answer: C
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12) Compared to an electronic payments system, a payments system
based on checks has the major drawback that
1. A)
checks are less costly to process.
2. B)
checks take longer to process, meaning that it may take several days before the
depositor can get her cash.
3. C)
fraud may be more difficult to commit when paper receipts are eliminated.
4. D)
legal liability is more clearly defined.
Answer: B
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