Deck 13: Money and the Financial System.

Question 1

The earliest type of exchange involved _____

A) coins.
B) barter.
C) commodity money.
D) fiduciary money.
E) fiat money.

Answer 1

barter.

Question 2

Barter is the direct exchange of goods and services for _____

A) any kind of money.
B) other goods and services.
C) either goods or money.
D) commodity money.
E) foreign currency.

Answer 2

other goods and services.

Question 3

As the variety of goods and services increases, barter becomes _____

A) easier because the chance of there being a double coincidence of wants increases.
B) harder because the chance of there being a double coincidence of wants increases.
C) easier because the chance of there being a double coincidence of wants decreases.
D) harder because the chance of there being a double coincidence of wants decreases.
E) easier because people have more options to choose from.

Answer 3

harder because the chance of there being a double coincidence of wants decreases.

Question 4

Which of the following statements is true of a barter system?

A) In a barter system, it is difficult to keep track of the relative values of goods and services.
B) In a barter system, an individual offers money to import goods and services.
C) In a barter system, an individual offers currency notes to get coins.
D) In a barter system, different kinds of money are exchanged for one another.
E) In a barter system, individuals are self-sufficient.

Question 5

The more specialized labor becomes, the _____

A) less likely it is that a double coincidence of wants will exist, and the less likely it is that monetary exchange will develop.
B) less likely it is that a double coincidence of wants will exist, and the more likely it is that monetary exchange will develop.
C) more likely it is that a double coincidence of wants will exist, and the less likely it is that monetary exchange will develop.
D) more likely it is that a double coincidence of wants will exist, and the more likely it is that monetary exchange will develop.
E) more likely it is that the individual is producing only what he or she wants to consume.

Question 6

Which of the following best illustrates the double coincidence of wants?

A) Both Tom and Jerry would like to purchase the same good.
B) Tom has something he's willing to trade with Jerry; Jerry has something he's not willing to trade with Tom.
C) Tom and Jerry have very similar tastes; hence, Tom's wants coincide with Jerry's.
D) Tom has something he's willing to trade with Jerry, who wants it; Jerry has something he's willing to trade with Tom, who wants it.
E) Tom has something Jerry wants; Jerry has nothing Tom wants.

Question 7

Which of the following statements is true of a barter system?

A) In a barter system economy, no rates of exchange are defined.
B) In a barter system economy, there are as many different rates of exchange as there are pairs of goods to trade.
C) In a barter system economy, rates of exchange are expressed in goods per dollar.
D) In a barter system economy, rates of exchange are expressed in dollars per good.
E) In a barter system economy, rates of exchange are denominated in gold or silver.

Question 8

Barter may be the only alternative _____

A) if there is an excess supply of money.
B) if the price system is not allowed to function properly.
C) if disinflation sets in.
D) if hyperinflation sets in.
E) if fiat money is discontinued.

Question 9

What gave rise to money exchanges?

A) self-sufficiency
B) the high transaction costs of barter
C) the existence of a double coincidence of wants
D) the development of fiat money
E) token money

Question 10

Identify the statement that is true of a barter system.

A) In a barter system, trade will only occur if there is a double coincidence of wants.
B) In a barter system, an individual offers coins to get a good or service.
C) In a barter system, an individual offers commodity money to get fiat money.
D) In a barter system, different kinds of money are exchanged for one another.
E) In a barter system, individuals are self-sufficient.

Question 11

Before specialization, _____

A) families were largely self-sufficient.
B) families produced much more than they could each consume.
C) there was a great need for exchange between families.
D) families consumed much more than they could each produce.
E) families exchanged only goods, not services.

Question 12

The greater the number of different goods available in an economy, the _____

A) less likely it is that a double coincidence of wants will exist, and the less likely it is that monetary exchange will develop.
B) less likely it is that a double coincidence of wants will exist, and the more likely it is that monetary exchange will develop.
C) more likely it is that a double coincidence of wants will exist, and the less likely it is that monetary exchange will develop.
D) more likely it is that a double coincidence of wants will exist, and the more likely it is that monetary exchange will develop.
E) more likely it is that individuals are producing only goods they want to consume.

Question 13

Barter was more feasible in primitive societies than in modern societies because _____

A) there was no inflation in primitive societies.
B) there were many goods available for trade in primitive societies, so people could always find the goods that they wanted.
C) specialization was limited, and thus there were few goods available for trade in primitive societies.
D) specialization was limited, and thus there were many goods available for trade in primitive societies.
E) people in primitive societies had limited wants.

Question 14

Exchange is necessary in an economy if _____

A) output is to be produced.
B) output is to be consumed.
C) individuals are self-sufficient.
D) families are self-sufficient.
E) labor is specialized.

Question 15

The first step in the evolution of money involved the use of _____

A) physical commodities.
B) barter.
C) pieces of paper representing claims on physical commodities.
D) pieces of paper with no intrinsic value.
E) electronic entries representing claims on pieces of paper with no intrinsic value.

Question 16

Specialization of labor means that _____

A) production requires a special kind of labor.
B) the overall skill level of labor is increasing.
C) individuals produce goods other than those they want to consume.
D) individuals achieve self-sufficiency in production.
E) exchange within an economy consists of trading services.

Question 17

The greater the degree of specialization in the economy, the _____

A) easier it is to discover a double coincidence of wants.
B) more feasible a barter system is.
C) less likely it is that monetary exchange will develop.
D) harder it is to negotiate an exchange rate between all pairs of goods.
E) more likely it is that individual consumers are self-sufficient.

Question 18

With the emergence of specialization, ____ was necessary.

A) exchange
B) production
C) labor
D) self-sufficiency
E) fiat money

Question 19

Which of the following statements is true of a barter system?

A) In a barter system, an individual offers one good or service to get another good or service.
B) In a barter system, an individual offers money to get a good or service.
C) In a barter system, an individual offers a good or service to get money.
D) In a barter system, different kinds of money are exchanged for one another.
E) In a barter system, all individuals are self-sufficient.

Question 20

Specialization of labor means that _____

A) production requires a special kind of labor.
B) the overall skill level of labor is increasing over time.
C) individuals produce goods that they are relatively good at producing and trade for those that they do not produce.
D) individuals achieve self-sufficiency in production by producing all the goods that they require.
E) exchange within the economy consists of trading in services.

Question 21

The unit of account function of money _____

A) means that money should be durable.
B) means that money is used to measure the value of all goods.
C) requires that money be made of something valuable.
D) means that money can be used to save up purchasing power.
E) means that money is more easily counted than goods.

Question 22

Commodity money is something _____

A) that has no intrinsic value.
B) that has an intrinsic value.
C) that is based on a valuable metal.
D) whose value never changes.
E) whose value cannot be determined.

Question 23

Which of the following was the earliest type of money?

A) coins
B) barter
C) commodity money
D) token money
E) fiat money

Question 24

Which quality best defines money that does not tie up otherwise valuable resources?

A) durable
B) portable
C) divisible
D) uniform quality
E) low opportunity cost

Question 25

Commitments to make or receive payments in the future are made easier by money's function as a _____

A) unit of account.
B) store of value.
C) medium of exchange.
D) form of barter.
E) commodity.

Question 26

Whatever serves as a medium of exchange is _____

A) generally accepted in return for goods and services.
B) money as long as it is also the best such medium of exchange available.
C) money as long as it is the most widely used currency.
D) money as long as it is not also legal tender.
E) not money unless it continues to be backed by its issuing institution.

Question 27

In order for something to be used as money, it must be _____

A) made of paper.
B) issued by banks.
C) declared to be money.
D) generally acceptable.
E) made of something valuable.

Question 28

Whatever functions as money must be _____

A) varied in quality.
B) accepted as deposit by banks.
C) backed by precious metals like gold or silver.
D) completely indestructible.
E) limited in supply.

Question 29

When silver and gold were used as money, both their quantity and quality were open to question. The solution was _____

A) seashells.
B) seigniorage.
C) notes.
D) coinage.
E) fiat money.

Question 30

Which quality best defines money that should maintain its quality over time?

A) durable
B) portable
C) divisible
D) uniform quality
E) low opportunity cost

Question 31

The three important functions of money are _____

A) serving as a medium of exchange, facilitating trade, and serving as a unit of account.
B) serving as a unit of account, facilitating trade, and serving as a store of value.
C) serving as a store of value, facilitating trade, and ensuring a double coincidence of wants.
D) facilitating trade, serving as a medium of exchange, and serving as a unit of account.
E) serving as a medium of exchange, a unit of account, and a store of value.

Question 32

Suppose an ocean liner sinks and its passengers are stranded on a lush tropical island. Which of the following could most likely be used as money in the economy that develops among the survivors?

A) the life jackets they put on when leaving the ship
B) the beads from the necklaces that were given out as party favors on the night the ship sank
C) the leaves of the various tropical trees on the island
D) the fish in the sea around the island
E) the sand on the island's beaches

Question 33

How does money function as a unit of account?

A) Money has intrinsic worth as a commodity.
B) Money is convertible into commodities that have intrinsic worth.
C) The prices of all goods and services are measured in terms of money.
D) Things that function as money can do so because people know there is a standard of value that ultimately backs the money even if it is only faith.
E) Bank accounts make it easy for people to store their wealth.

Question 34

Which quality best defines money that is valued equally in exchange?

A) durable
B) portable
C) divisible
D) uniform quality
E) low opportunity cost

Question 35

Which of the following has served as money in many federal prisons in the United States since 2004?

A) postage stamps
B) energy bars
C) plastic-and-foil pouches of mackerel
D) cans of tuna
E) cigarettes

Question 36

Which quality best defines money that easily divisible into smaller units?

A) durable
B) portable
C) divisible
D) uniform quality
E) low opportunity cost

Question 37

Barter works best when _____

A) there is an absence of a double coincidence of wants.
B) many different products are available in the economy.
C) money is readily available to establish relative prices.
D) each trader has what the other wants and wants what the other has.
E) highly developed economies achieve extensive specialization of labor.

Question 38

Which quality best defines money that can be easily carried?

A) durable
B) portable
C) divisible
D) uniform quality
E) low opportunity cost

Question 39

If people use quartz as a medium of exchange, then they _____

A) are in a barter economy.
B) are using commodity money.
C) are using token money.
D) are using legal tender.
E) are using fiat money.

Question 40

Which of the following is true of the unit of account function of money?

A) It makes money durable in nature.
B) It makes the values of goods and services known.
C) It implies that money should be made of something valuable.
D) It implies that money can be used to save up purchasing power.
E) It implies that money is more easily counted than goods.

Question 41

_____ is money whose face value exceeds its production cost.

A) Seashell currency
B) Token money
C) A note
D) Coinage
E) Fiat money

Question 42

Fiat money _____

A) has value because people accept it.
B) has a high intrinsic value.
C) is backed by commodity reserves.
D) is money because of its metallic content.
E) is frequently clipped.

Question 43

Fiat money is backed by _____

A) gold or silver.
B) fractional reserves.
C) the promise of a bank to redeem it upon presentation.
D) the commodity in which it is denominated.
E) nothing.

Question 44

The reserve ratio is the ratio of _____

A) Federal Reserve member banks to nonmember banks.
B) Federal Reserve nonmember banks to member banks.
C) Federal Reserve member banks to all U.S. banks.
D) a bank's total deposits to its reserves.
E) a bank's reserves to its total deposits.

Question 45

Which of the following is legal tender?

A) a check
B) a Federal Reserve note
C) a banknote issued by a foreign bank
D) a credit card
E) a traveler's check

Question 46

Federal Reserve notes are _____

A) checks.
B) commodity money.
C) coins.
D) backed by gold.
E) fiat money.

Question 47

Identify the correct statement regarding a fractional reserve banking system.

A) Only a fraction of the banks in the system are allowed to create money.
B) Only a fraction of the banks in the system have reserves.
C) The claims outstanding against the bank are only a fraction of the bank's total reserves.
D) Each bank must deposit a fraction of its reserves with the Federal Reserve Bank.
E) Bank reserves represent only a fraction of bank deposits.

Question 48

Money that is acceptable because the government requires that it be accepted in payment of debt is _____

A) legal tender.
B) commodity money.
C) bad money.
D) broad money.
E) representative money.

Question 49

Using coins allowed for payment by _____

A) count.
B) weight.
C) fiat money.
D) banknotes.
E) clipping.

Question 50

Coins are minted with serrated edges _____

A) to make it obvious that they are made of cheap alloys.
B) so that cheaper metals do not have to be used.
C) to allow words to be printed on the border.
D) to prevent the coins from being clipped.
E) to make them jingle less when they are rubbed together.

Question 51

Any bank that uses deposits to make loans _____

A) operates on a 100 percent reserve system.
B) operates on a fractional reserve system.
C) does not operate on a reserve system.
D) does not keep reserves in its vaults.
E) charges an interest rate determined by the reserve ratio.

Question 52

The value of fiat money is fundamentally determined by the _____

A) reputation of the bank that holds it.
B) reputation of the person who holds it.
C) value of the gold or silver for which it can be redeemed.
D) value of the commodities for which it can be traded.
E) value of comparable stocks and bonds.

Question 53

Token money is _____

A) money whose face value exceeds its production cost.
B) money whose face value is less than its production cost.
C) anything that loses its purchasing power over time.
D) money that has no value.
E) money that is redeemable for any commodity.

Question 54

Goldsmiths are considered to be the forerunners of modern banks because they _____

A) had safes to keep gold secure.
B) issued gold coins.
C) created money by lending out gold reserves.
D) created legal tender.
E) verified the quality of money.

Question 55

An important function of commercial banks is to _____

A) print new currency.
B) issue fiat money.
C) mint coins.
D) redeem currency for precious metals.
E) make loans.

Question 56

Fractional reserve banking occurs when _____

A) a bank has reserves that exceed its deposits.
B) a bank has reserves that are equal to its deposits.
C) a bank has reserves that are less than its deposits.
D) some depositors lose their deposits through poor bank management.
E) some lenders fail to repay their loans.

Question 57

Which type of money has the lowest opportunity cost?

A) silver coins
B) gold coins
C) commodity money
D) diamonds
E) fiat money

Question 58

_____ were among the first bankers.

A) Seigniors
B) Governments
C) Savings-and-loan institutions
D) Farmers
E) Goldsmiths

Question 59

What did coinage determine?

A) the amount that had to be weighed
B) which scales to use
C) the quality of the metal with each exchange
D) which cheaper metals were mixed in
E) both the quantity and the quality of the metal

Question 60

What is token money in the United States?

A) all coins
B) some of the paper money in circulation
C) 25-cent coins
D) gold bars
E) some coins and all paper money now in circulation

Question 61

If relative to the base period of 1982 through 1984, the consumer price index for 2017 was 244, then the purchasing power of a dollar in 2017, measured in 1982-1984 dollars, was

A) $2.44.
B) $0.24.
C) $0.41.
D) $4.10.
E) $1.00.

Question 62

The main source of profit for financial institutions is _____

A) their ownership of stocks in commercial corporations.
B) their ownership of real assets received in foreclosures on loans to households.
C) the fees charged for holding and servicing checking accounts.
D) the difference between interest paid on deposits and interest received on loans.
E) the difference between the cost of creating new money and the interest paid on loans.

Question 63

If the price index in 2017 was 244, the purchasing power of a dollar measured in terms of the base year was _____

A) $2.38.
B) $0.24.
C) $0.41.
D) $4.10.
E) $1.00.

Question 64

Financial institutions _____

A) accumulate funds from savers and lend them to borrowers.
B) accumulate funds from borrowers and lend them to savers.
C) borrow funds from the government and lend them to borrowers.
D) borrow funds from the government and lend them to savers.
E) print money.

Question 65

If a financial institution pays an interest rate of 1% to savers and charges borrowers 3%, they earn a profit of _____

A) 1 percent.
B) 2 percent.
C) 3 percent.
D) 4 percent.
E) 5 percent.

Question 66

If the purchasing power of a dollar measured in terms of the base year was $0.42, what was the price index?

A) 238
B) 244
C) 41
D) 42
E) 100

Question 67

Money is legal tender if _____

A) people willingly accept it in payment of debts.
B) it is backed by gold or silver.
C) it is commodity money.
D) the government says it is.
E) it is in a bank account.

Question 68

If the purchasing power of a dollar measured in terms of the base year was $1, what was the price index?

A) 238
B) 244
C) 41
D) 42
E) 100

Question 69

Which of the following is true of a price level increase in an economy?

A) When the price level increases, the purchasing power of money increases.
B) When the price level increases, the purchasing power of money decreases.
C) When the price level increases, the purchasing power of money remains unchanged.
D) When the price level increases, the purchasing power of money either increases or decreases, depending upon the size of the national debt.
E) When the price level increases, the purchasing power of money either increases or decreases, depending upon the level of government expenditures.

Question 70

If the purchasing power of a dollar measured in terms of the base year was $0.41, what was the price index?

A) 238
B) 244
C) 41
D) 42
E) 100

Question 71

Which of the following is true if a nation's official money fails to serve as a medium of exchange?

A) Nothing will replace money to help facilitate exchange.
B) There will be an increase in economic efficiency.
C) Resources will divert from production to exchange.
D) Transaction costs of exchange will decrease.
E) Fewer barter exchanges will be completed.

Question 72

The wide acceptance of fiat money is determined by _____

A) people's belief that it is worth something.
B) the amount of precious metal that the government holds to back the money.
C) the money's market value as a commodity.
D) the rate of interest, which is the price paid to borrow money.
E) its ability to function as a unit of account.

Question 73

If relative to the base period of 1982 through 1984, the consumer price index for 2015 was 238, then the purchasing power of a dollar in 2015, measured in 1982-1984 dollars, was _____

A) $2.38.
B) $0.24.
C) $0.42.
D) $4.20.
E) $1.

Question 74

Which of the following is most critical for the maintenance of an efficient and productive economy?

A) money backed by gold or silver
B) steadily rising prices
C) an unlimited and unregulated supply of money
D) properly functioning money
E) a well-organized barter system

Question 75

Which of the following is associated with the problem of hyperinflation?

A) Money is in short supply.
B) The value of money rises dramatically.
C) The government runs out of money.
D) People look for alternatives to using money.
E) People start to hold on to money for long periods of time.

Question 76

To measure the purchasing power of the dollar in a particular year _____

A) compute the price index for that year and then divide 100 by that price index.
B) compute the price index for that year and then multiply 100 by that price index.
C) compute the price index for that year and then add 100 to that price index.
D) compute the price index for that year and then subtract 100 from that price index.
E) compute the price index for that year.

Question 77

One problem with fiat money, as compared to commodity money, is that _____

A) more resources are used to create fiat money.
B) there is frequently too little fiat money available.
C) there is a greater potential for inflation with fiat money.
D) fiat money must be turned in to the government to receive the commodity on which it is based.
E) fiat money is less divisible than commodity money.

Question 78

If the price index was 100, the purchasing power of a dollar measured in terms of the base year was _____

A) $2.38.
B) $0.24.
C) $0.41.
D) $4.10.
E) $1.00.

Question 79

If the price index in 2015 was 238, the purchasing power of a dollar measured in terms of the base year was _____

A) $2.38.
B) $0.24.
C) $0.42.
D) $4.20.
E) $1.00.

Question 80

The purchasing power of each dollar over time _____

A) varies inversely with the economy's price level.
B) varies directly with the economy's price level.
C) is unrelated to the economy's price level.
D) depends upon the size of the national debt.
E) depends upon the level of government expenditures.