Question 1

What is meant by the phrase "double coincidence of wants" in a barter economy?

Accepted Answer

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Question 2

If the interest rate is 5%, the value of $1,000 at the end of 10 years is

Accepted Answer

The value of $1,000 at the end of 10 years with a 5% interest rate, compounded annually, is calculated using the formula for compound interest: A = P(1 + r)^n, where A is the amount of money accumulated after n years, including interest, P is the principal amount ($1,000), r is the annual interest rate (5% or 0.05), and n is the time the money is invested or borrowed for, in years (10). Plugging in the values: A = 1000(1 + 0.05)^10 = $1,628.89.

Question 3

Edward would be equally happy with receiving $95 today or $100 one year from today.  Edward's friend Bella would be just as happy receiving $90 today or $100 one year from today. Based on this information, which of the following best describes the difference between Edward and Bella?

Accepted Answer

Bella is willing to accept a lower amount today ($90) instead of waiting a year for $100, indicating she places a higher value on money now than in the future. This is defined as having a higher rate of time preference. Edward, on the other hand, requires $95 to forgo $100 in a year, showing a lower rate of time preference compared to Bella.

Question 4

Sherry says that she requires a 3% rate of interest in order to lend you some money. This implies that for Sherry the present value of $100 to be received one year from today is

Accepted Answer

The present value of $100 to be received one year from today at a 3% interest rate is calculated using the formula PV = FV / (1 + r)^n, where PV is the present value, FV is the future value ($100), r is the interest rate (3% or 0.03), and n is the number of periods (1 year). Plugging in the values gives PV = $100 / (1 + 0.03)^1 = $100 / 1.03 = $97.09.

Question 5

For an asset to function as commodity money, it must be easily divisible, easily standardized, easy to carry around, physically attractive, and broadly demanded.

Accepted Answer

Commodity money must be easily divisible, standardized, portable, durable, and widely accepted, but physical attractiveness is not a necessary criterion.

Question 6

With measurements of monetary aggregates such as M1 and M2, the money supply is relatively easy to measure.

Accepted Answer

Monetary aggregates like M1 and M2 provide a framework for measuring the money supply, but accurately capturing all components of these aggregates can be challenging due to the dynamic nature of financial markets, innovations in financial instruments, and differences in definitions across countries.

Question 7

Joshua says that he would need 3% interest in order to lend you money which you will pay back in two years. This implies that for Joshua the present value of $100 to be received two years from today is what amount?

Accepted Answer

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Question 8

If you borrow $1,000 today to be paid back one year from today at 5% interest, the payment you will have to make in one year will be

Accepted Answer

The payment will be the principal plus the interest for one year, which is $1,000 * 5% = $50, so the total payment is $1,000 + $50 = $1,050.

Question 9

What are some of the challenges of using a commodity money in society?

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Question 10

What is the term for removal of funds from a financial intermediary (e.g., a bank)to invest them directly, as through a mutual fund?

Accepted Answer

Disintermediation refers to the process where investors withdraw funds from intermediary financial institutions (like banks) to invest them directly, often in search of higher returns. This can happen through direct investments in securities, mutual funds, or other investment vehicles, bypassing the traditional banking system.

Question 11

Which of the following statements is not true of cryptocurrency?

Accepted Answer

Cryptocurrency is fundamentally decentralized and not centralized by any banks, let alone just two worldwide. It operates on a distributed ledger technology, typically blockchain, that ensures its operations are not controlled by a single entity or institution.

Question 12

What do we refer to when we talk about Becca's time preference?

Accepted Answer

Becca's time preference refers to her preference for consuming goods or services now rather than in the future, indicating how she values present consumption over future consumption.

Question 13

For a social justice class, you take a field trip to a prison, where you notice prisoners exchanging cigarettes for other items, such as a candy bar, a magazine, a soft drink, and so on. In this circumstance, cigarettes could be considered money .

Accepted Answer

In this context, cigarettes are being used as a medium of exchange, which is one of the primary functions of money. They are being exchanged for goods and services within the prison, acting as a form of currency.

Question 14

Explain why it is that money received today has greater value than money received in the future.

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Question 15

The higher a person's rate of time preference, the lower the interest rate needed to get them to defer their consumption to the future.

Accepted Answer

A higher rate of time preference indicates a stronger preference for current consumption over future consumption, meaning a higher interest rate would be needed to incentivize them to defer consumption to the future.

Quiz 2: Money, Money Supply and Interest