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CHAPTER 2
Principles of Money
1. The unique and primary function of money is that it serves as a
a. unit of account.
b. generally acceptable means of payment.
c. store of value.
d. means for barter.
ANSWER: b
2. Something that serves as a generally acceptable means of payment will, of necessity, function as
a
a. means for barter.
b. near-money.
c. store of value.
d. unit of DNFD.
ANSWER: c
3.
Which is not a function of money?
a. to serve as a store of value
b. to serve as a unit of account
c. to serve as a means for barter
d. to serve as a means of payment
ANSWER: c
4. Which of the following is not an important characteristic of something that functions as money?
a. it is generally accepted to make payments
b. it is durable and scarce
c. it is only issued by the government
d. it is a unit of account and a store of value
ANSWER: c
5. The distinguishing factor of money in the financial system is which of the following?
a. It is issued only by the Fed
b. It is a generally acceptable medium of exchange
c. It is illiquid
d. It has little or no transaction costs
ANSWER: b
6. The best definition of a medium of exchange is which of the following?
a. Something that encourages the specialization and division of labor
b. Something that retains it value if held
c. The accounting unit or standardized measure of value in which prices are quoted
d. A means of payment; something used in transactions to make payments.
ANSWER: d
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7. The barter system is considered to be which of the following?
a. Highly effective for making transactions
b. Highly efficient
c. Costly, cumbersome, and inefficient
d. a necessary part of the financial system
ANSWER: c
8. When using the barter system, it is necessary
a. to find something to serve as money.
b. to engage in either direct or indirect finance.
c. that financial markets be unregulated.
d. to find a double coincidence of wants.
ANSWER: d
9. Compared to a monetary system of exchange, the barter system does which of the following?
a. Increases transaction costs
b. Lowers the volume of exchange in the economy
c. Promotes inefficient use of time and energy
d. All of the above
ANSWER: d
10. Barter systems tend to be found most often in which of the following economies?
a. Agricultural economies
b. Service-oriented economies
c. Shipping economies
d. Industrial economies
ANSWER: a
11. In an economy, money promotes
a. limited exchanges of goods and services.
b. ineffective time management.
c. individual consumption.
d. efficient production.
ANSWER: d
12. A unit of account refers to which of the following?
a. An accounting unit
b. Monetary aggregates
c. Large time deposits
d. money market deposit accounts
ANSWER: a
13. The dollar is considered to be which of these?
a. the profit standard for economic evaluation
b. an excellent store of value even in highly inflationary times
c. the monetary unit of account
d. an efficient means of payment since the federal government is the only issuer of the dollar
ANSWER: c
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14. It is possible with a unit of account to do which of the following?
a. Compare relative values of various goods and services
b. Keep records about prices and debts
c. Simplify actual transactions throughout the economy
d. All of the above
ANSWER: d
15. The development of money facilitates all of the following except
a. exchange.
b. specialization and division of labor.
c. economic development.
d. the double coincidence of wants
ANSWER: d
16. Which of these is considered money in the U.S. today?
a. Credit cards
b. Currency and checkable deposits
c. Gold and silver coins
d. Debit cards
ANSWER: b
17. The following is true about the relative magnitudes of the monetary and credit aggregates:
a. The only monetary aggregate that contains currency is M1.
b. The growth rate of M1 has been faster than the growth rates of the other monetary and credit
aggregates over time.
c. M1 > M2 > M3 > DNFD.
d. DNFD > M3 > M2> M1.
ANSWER: d
18. Compared to a regular checking account, money market deposit accounts
a. provide limited check writing.
b. pay higher interest.
c. require a higher minimum balance.
d. All of the above
ANSWER: d
19. M2 contains which of the following?
a. Travelers' checks
b. M3
c. DNFD
d. savings bonds
ANSWER: a
20. Which of the following best defines M2?
a. Small savings and time deposits and individual money market mutual funds
b. Everything in M1 plus some other highly liquid assets
c. Everything in M1 plus government and private debt
d. Everything in M1 plus large time deposits, term repurchase agreements, term Eurodollars,
and institutional money market mutual funds
ANSWER: b
21. Which of the following best defines M3?
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a.
b.
c.
d.
Small savings and time deposits and individual money market mutual funds
Everything in M2 plus everything in M1
Everything in M2 plus public and private debt
Everything in M2 plus large time deposits, term repurchase agreements, term Eurodollars,
and institutional money market mutual funds
ANSWER: d
22. Checkable deposits are included in which monetary aggregate?
a. M1
b. M2
c. M3
d. All of the above
ANSWER: d
23. As we move from M1 to M2 to M3,
a. assets that are more liquid are added.
b. assets that are less liquid are added.
c. liquid assets have been added; they are all in M1.
d. None of the above.
ANSWER: b
24. Generally when one compares the contents of the monetary and credit aggregates, one will find
that
a. items in DNFD are not acceptable means of payment and are not money.
b. items in M2 are less liquid then items in DNFD.
c. items in M1 expose the owner to little risk; hence they are referred to as near-monies.
d. there is no relationship between where an asset is placed in the aggregates and the assets’
respective liquidity.
ANSWER: a
25. Checkable deposits include which of these?
a. U.S. Savings Bonds
b. Savings deposits
c. Demand deposits
d. Money market mutual funds
ANSWER: c
26. Which monetary aggregate currently measures the definition of money used in transactions most
accurately?
a. M1
b. M2
c. M3
d. DNFD
ANSWER: a
27. "Means of payment" best describes which monetary aggregate?
a. M1
b. M2
c. M3
d. DNFD
ANSWER: a
Principles of Money
28. NOW Accounts are included in which monetary aggregate?
a. M1
b. M2
c. M3
d. All the above
ANSWER: d
29. Money market deposit accounts are included in which monetary aggregate?
a. M1 only
b. M1, M2, and M3
c. M2, M3
d. M1, M2, M3, and DNFD
ANSWER: c
30. Which is the least liquid?
a. Passbook savings deposits
b. Money market mutual funds
c. Large time deposits
d. Overnight repurchase agreements
ANSWER: c
31. Domestic nonfinancial debt is a measure of which of the following?
a. Bankers' acceptances
b. Outstanding foreign loans
c. Outstanding loans and debts, accumulated in the present and past excluding the debt of
financial institutions
d. Debt of financial institutions used for relending purposes
ANSWER: c
32. M1 includes all of the following except
a. Currency.
b. checkable deposits.
c. money market deposit accounts.
d. travelers’ checks.
ANSWER: c
33. Which aggregate is the largest?
a. M1
b. M2
c. M3
d. DNFD
ANSWER: d
34. In the early and mid-1980s, what was the primary measure of money that the Fed used in the
execution of monetary policy?
a. DNFD
b. M2
c. M3
d. M1
ANSWER: d
35. Which is used as a measure of transactions money?
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a. DNFD
b. M2
c. M1
d. M3
ANSWER: c
36. During the late 1980s, which measure gained importance to the Fed?
a. M1
b. Large-denomination time deposits
c. Short-term treasury debt
d. M2
ANSWER: d
37. In the early 1990s, the Fed was most interested in which aggregate for an indicator of the level of
economic activity?
a. U.S. Savings Bonds
b. domestic nonfinancial debt (DNFD)
c. Money market mutual funds
d. Money market deposit accounts
ANSWER: b
38. DNFD does not include the debt of financial institutions. This is done to avoid
a. double counting.
b. inefficiencies.
c. high debt-GDP ratios for the economy as a whole.
d. public outcries about the high level of debt
ANSWER: a
39. The payment mechanism is how money is
a. divided among investors.
b. used for a measure of wealth.
c. used to make payments.
d. considered a store of value.
ANSWER: c
40. The balance in a personal checking account is considered which of these?
a. Capital
b. Currency
c. A nonmonetary financial asset
d. Money
ANSWER: d
41. Which is a form of an electronic funds transfer system?
a. Carbon-copy written checks
b. automatic teller machines (ATMs)
c. Bimonthly employee checks
d. credit card purchases over the Internet
ANSWER: b
Principles of Money
42. The intent of an electronic funds transfer system is to
a. eliminate overdrafts that check writing allows.
b. expand written check use.
c. strengthen the dollar as a means of payment.
d. increase convenience and service to the public and reduce the costs of making payments.
ANSWER: d
43. Consumers have been slow to give up checks for electronic payments because
a. checks leave a paper trail and consumers do not want to give up float.
b. checks are a more efficient way of making payments.
c. electronic payments are not legal at this time.
d. all of the above.
ANSWER: d
44. A store of value is which of the following?
a. A standardized measure of value
b. A means of payment
c. Something which retains its value if held
d. Something used to make exchanges in a nonmonetary economy
ANSWER: c
45. Which of the following is not included in M1?
a. Small savings
b. Currency in the hands of the public
c. other checkable deposits
d. Demand deposits at commercial banks
ANSWER: a
46. Which of the following is not included in M2?
a. Individual money market mutual funds
b. Currency
c. Term Eurodollars
d. Travelers' checks
ANSWER: c
47. Interest earning checking accounts are part of?
a. Small savings accounts
b. Currency in the hands of the public
c. Demand deposits at commercial banks
d. Other checkable deposits at depository institutions
ANSWER: d
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48. Which of the following is false?
a. Money is anything that functions as a means of payment (medium of exchange), a unit of
account, and a store of value.
b. The Fed monitors several measures of money because there are several aggregates that can
be used to make payments.
c. M1 (transactions money) is currency in the hands of the public plus checkable deposits.
d. M2 includes everything in M1 plus other highly liquid assets.
e. M3 includes everything in M2 plus some less-liquid assets.
ANSWER: b
49. When credit flows decline, DNFD
a. increases.
b. declines.
c. remains the same.
d. declines then increases.
ANSWER: b
50. The most rapidly growing type of financial intermediary is which of the following?
a. depository institutions.
b. credit unions.
c. mutual funds.
d. insurance companies.
ANSWER: c
51. All financial claims are which of the following?
a. Claims on money
b. Mutual funds
c. Bank deposits subject to withdrawal by writing a check
d. insured by the FDIC
ANSWER: a
52. Which of the following is true?
a. The items included in the various monetary aggregates have remained the same over time.
b. The Fed collects, publishes, and monitors data on several monetary aggregates.
c. The Fed focuses on changes in monetary aggregates not on changes in credit market activity.
d. M3 includes M2 plus M1 plus other fairly illiquid financial assets.
ANSWER: b
53. Risk in a financial claim involves the
a. possibility that the financial claim is liquid.
b. probability that the value of the financial claim will decline.
c. probability that the claim can be converted into money.
d. cost of converting the claim into money.
ANSWER: b
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54. If either the cost is high or a substantial amount of time is needed to convert an asset to money, it
is usually referred to as which of these?
a. Illiquid
b. Highly liquid
c. Perfectly liquid
d. Near monies
ANSWER: a
55. Computer terminals used in conjunction with a debit card to electronically transfer funds from
checking accounts to third parties are called
a. payments mechanism.
b. ATMs.
c. point-of-sale terminals.
d. NOW accounts.
ANSWER: c
56. Other industrialized countries, such as Japan, Mexico, and Canada, have currencies that have
value because they are
a. traded in the foreign exchange market.
b. based upon the American dollar.
c. accepted in trade and used to make payments.
d. issued by the Fed.
ANSWER: c
57. Checkable deposits are included in which measure of money?
a. M1
b. M2
c. M3
d. All of the above
ANSWER: d
58. Domestic nonfinancial debt (DNFD)
a. is a measure of current debts accumulated this fiscal year.
b. includes total credit market debt owned by domestic spending units.
c. is a measure of total credit market debt owned by the domestic nonfinancial sector, excluding
government debt.
d. includes total outstanding credit market debt owed by the domestic public and private
nonfinancial sectors, including government and private debt.
ANSWER: d
59. As we move from M1 to M2 to M3
a. the aggregates contain more and more liquid assets.
b. the aggregate shrinks in importance in the execution of monetary policy.
c. the aggregate represents a broader measure of money that includes less liquid near monies.
d. M1 is always larger than M2 and M2 is always larger than M3.
ANSWER: c
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60. How do demand deposits differ from other checkable deposits?
a. Demand deposits are not as liquid as other checkable deposits.
b. Demand deposits earn a higher interest rate than other checkable deposits.
c. Demand deposits are non-interest-earning checking deposits while other checkable deposits
earn interest..
d. There is no difference between demand deposits and other checkable deposits.
ANSWER: c
61. How can money be distinguished from other financial assets?
a. Money is unique because it is acceptable as a means of payment.
b. Money is illiquid.
c. Money can never lose value in real terms.
d. Money pays no interest and other financial assets do.
ANSWER: a
62. Which of the following is false regarding money market deposit accounts?
a. MMDAs are part of M1.
b. MMDAs have limited check writing.
c. MMDAs generally require higher minimum balances than checking accounts.
d. MMDAs earn higher interest than most checking accounts.
ANSWER: a
63. Money represents current purchasing power. Other financial claims represent
a. future purchasing power.
b. other forms of money.
c. current debt claims.
d. future claims on money.
ANSWER: d
64. The difference between other checkable deposits and demand deposits can best be described as
follows:
a. Checkable deposits are a subset of demand deposits.
b. Demand deposits are checkable deposits that are non-interest-earning.
c. Demand deposits earn interest; checkable deposits do not.
d. Demand deposits are part of M1; checkable deposits are not.
ANSWER: b
65. In recent years, a new currency was introduced. The primary reason was
a. to make the currency more difficult to counterfeit (technological advances had made
counterfeiting easier).
b. to increase the supply of currency in a growing economy.
c. to improve the appearance of the U.S. currency which was much less attractive than some
foreign currencies.
d. to recall old dollars that were held in large amounts outside the United States.
ANSWER: a
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66. Which of the following is true?
a. The U.S. money supply as defined by M1 consists of currency in the hands of the public.
b. Checks have become more important as a result of technological innovation.
c. Checks themselves are not money; the balances in checkable deposits are money.
d. The evolution of money and the payments system is often unrelated to the development of
the economy.
ANSWER: c
67. Smart cards differ from stored-value cards in that stored-value cards
a. have multiple uses and smart cards have a single use.
b. Are less sophisticated than smart cards.
c. have an embedded computer chip that stores information and may include a digital signature.
d. can be used in vending machines.
ANSWER: b
68. Which of the following is false?
a. domestic nonfinancial debt (DNFD) is a measure of outstanding loans and debts accumulated
in the present and past years.
b. DNFD refers to total credit market debt owed by the domestic nonfinancial sector including
the U.S. government, state and local governments, private nonfinancial firms, and
households.
c. Nonfinancial debt excludes the debt of financial institutions—those institutions that borrow
solely to re-lend.
d. DNFD is the broadest monetary aggregate.
ANSWER: d
69. Which of the following is false?
a. The payments mechanism is the means by which transactions are completed; how money is
transferred among transactors.
b. When you write a check at the grocers, dollars are then credited (added) to the deposit
account of the grocer, and debited (removed) from your account.
c. The balances in checkable deposits are money.
d. technological advance are making checks much more important as a means of payment than
in the past.
ANSWER: d
70. An electronic funds transfer system
a. makes payments to third parties in response to electronic instructions rather than instructions
written on a paper check.
b. eliminates the need for deposit accounts.
c. is an inefficient way of transferring funds.
d. increases the costs of making payments at point of sales terminals.
ANSWER: a
71. Which of the following is false?
a. The high transactions costs associated with barter encourage the development of money.
b. What functions as money will change over time as an economy’s financial system evolves.
c. Political disputes over what is used to make payments has caused the Fed to monitor more
than one measure of money.
d. Given the importance and difficulties of measurement, the Fed monitors and publishes data
on several monetary aggregates and refines and recomputes the various measures
periodically.
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ANSWER: c
72. Which of the following is most liquid?
a. a rare oil painting
b. my house that has increased in value tremendously in recent years
c. my checkable deposit
d. my pension fund
ANSWER: c
73. Negotiable Order of Withdrawal (NOW) accounts are
a. interest earning checking accounts.
b. savings accounts included in M2.
c. liabilities of the Federal government.
d. less liquid than demand deposits.
ANSWER: a
74. Why does the Fed collect and publish several monetary measures?
a. Because it has excess funding from the government and doesn't know what else to do
b. Because the relationship between the various aggregates and economic activity changes over
time
c. Because measuring the stock of money is not straightforward because what functions as a
means of payment changes over time
d. Both b and c
ANSWER: d
75. When credit flows decline, DNFD
a. increases.
b. declines.
c. remains the same.
d. declines then increases.
ANSWER: b