Question 1

The optimal trade-off between current leisure and current consumption goods is expressed as

Accepted Answer

The optimal tradeoff between current leisure and current consumption goods is expressed by the indifference curve which shows the combination of consumption and leisure that provide the same level of satisfaction. The point where the budget constraint intersects with the indifference curve represents the best possible combination of leisure and consumption. In this case, option C is the only point that lies on the budget constraint and the highest possible indifference curve, indicating the best tradeoff between leisure and consumption goods. Hence, C is the optimal choice.

Question 2

Market exchange is typically an exchange of goods for money as opposed to goods for goods because use of money solves the problem of

Accepted Answer

Market exchange involves buyers and sellers coming together to trade goods and services. However, the essence of the market exchange is lost if there is no double coincidence of wants. The double coincidence of wants is a problem that arises when two independent individuals, each possessing goods the other wants, find it difficult to exchange goods. The use of money, as a medium of exchange, solves this problem and enables the smooth functioning of the market exchange.

Question 3

Yap stones had much in common with which form of money used in New France in 1685?

Accepted Answer

Yap stones and playing cards both served as unconventional forms of currency. In New France in 1685, playing cards were used as a form of money due to a shortage of coins, similar to how Yap stones were used as currency despite not being traditional money.

Question 4

The nominal interest rate affects the opportunity cost of leisure because

Accepted Answer

The nominal interest rate affects the opportunity cost of leisure because it influences the delay between when a consumer works and when they can spend the wage income. Higher interest rates increase the cost of delaying consumption, thus affecting the opportunity cost of leisure.

Question 5

Problems with the use of commodity money include all of the following except

Accepted Answer

The statement mentions problems with the use of commodity money, but all of the listed options except E are actual problems. Choice E mentions several good substitutes for commodity money, but this is not a problem with the use of commodity money, rather a potential advantage of using alternative forms of currency.

Question 6

The double coincidence of wants problem is solved by

Accepted Answer

The use of money allows for transactions to occur without requiring a double coincidence of wants. Money serves as a medium of exchange, eliminating the need for individuals to have exactly what the other person desires in exchange.

Question 7

Credit cards should not be considered a form of money because

Accepted Answer

Money is a physical object widely accepted as a medium of exchange and a unit of account, whereas credit is a financial tool allowing the borrowing of funds to be paid back at a later date with interest. While credit cards can be a method of payment, they do not meet the criteria of being universally accepted as a physical object with a consistent value.

Question 8

In the monetary intertemporal model,inflation is

Accepted Answer

In the monetary intertemporal model, inflation is equal to the money growth rate.

Question 9

A system that uses commodity-backed paper currency is most like a system that

Accepted Answer

A commodity-backed paper currency is a form of money that is backed by a tangible commodity, such as gold or silver. This is similar to commodity money, which is also backed by a tangible commodity. In contrast, a system that uses circulating private bank notes relies on the trustworthiness and reputation of private banks, whereas a fiat money system relies on the government's ability to enforce acceptance of its currency. A system that primarily relies on transaction deposits at banks is a form of narrow money, while commodity-backed paper currency is a form of high-powered money. Finally, a system that primarily relied on financial intermediaries could refer to a variety of different financial systems, but it does not specifically describe a system that uses commodity-backed paper currency.

Question 10

A system that uses commodity-based paper currency was used in Canada

Accepted Answer

A commodity-based paper currency system was used in Canada before 1929 when the Bank of Canada was established, and the country shifted towards a fully fiat currency system.

Question 11

The causal link between money growth and inflation is most closely associated with

Accepted Answer

Friedman and Schwartz were the pioneers in establishing the causal link between money growth and inflation. They argued that sustained inflation is a monetary phenomenon that arises from a persistent increase in the quantity of money supplied in an economy.

Question 12

Fiat money

Accepted Answer

The answer of Fiat money
...

Question 13

The cheque-clearing system is

Accepted Answer

The cheque-clearing system involves the exchange of cheques between banks, allowing for payments to be made between customers of different banks. Therefore, it is a mechanism by which banks carry out exchanges with each other.

Question 14

Circulating private bank notes

Accepted Answer

Private bank notes were widely used in Canada prior to 1935, before they were gradually replaced by the Bank of Canada notes.

Question 15

The Friedman rule for optimal money growth is that

Accepted Answer

The Friedman rule states that the optimal rate of money growth is one that implies a zero nominal interest rate. This is because the cost of holding money (foregoing interest income) should be offset by the benefits of having a stable and predictable value for money. Therefore, the Friedman rule aims to minimize the distortions and welfare losses associated with fluctuations in the inflation rate.

Question 16

In Canadian history,use of a commodity-backed paper currency is associated with the

Accepted Answer

The use of a commodity-backed paper currency is associated with the gold standard. Canada adopted the gold standard in 1871 and remained on it until 1933. Under the gold standard, the value of a country's currency was fixed to a specific amount of gold, which provided stability to the currency and helped facilitate international trade. However, the gold standard also limited a country's ability to use monetary policy to address economic issues, which was a contributing factor to the Great Depression.

Question 17

Use of Yap stones on the island of Yap was essentially a commodity-backed money

Accepted Answer

The use of Yap stones did not involve certificates or any other written record of ownership. Instead, ownership was recorded in the collective memory of the islanders, who knew who owned which stones. Yap stones were not easy to transport, as they were large and heavy, but their use as a commodity-backed money relied on the mutual recognition and trust of the islanders, who accepted them as valuable even though they were not in limited supply.

Question 18

In the contemporary Canadian economy,the best example of fiat money would be

Accepted Answer

The stock of notes issued by the Bank of Canada is an example of fiat money in the contemporary Canadian economy. Fiat money is a currency that has no intrinsic value and its value is established based on government decree or law. The notes issued by the Bank of Canada are legal tender, meaning that they are accepted as payment for goods and services because the government has declared them to be so. Therefore, they are an example of fiat money. Coins (A) are also an example of fiat money, but notes are more commonly used in everyday transactions. Deposits (B and C) are not considered fiat money, as they represent claims to assets but do not have their own intrinsic monetary value. Finally, the stock of notes in the foreign exchange market (E) could represent either fiat money or foreign currency, but this question refers specifically to the contemporary Canadian economy, so it would not be the best example of fiat money in this context.

Question 19

Widespread use of deposit banking and the use of cheques in transactions in Canada

Accepted Answer

Deposit banking and the use of cheques in Canada date back to the 19th century, as banks began to establish themselves and offer these services during that time.

Question 20

The optimal trade-off between current consumption goods and future consumption goods is expressed as

Accepted Answer

Option B is the only option that includes a graph that shows a concave curve, which represents the optimal trade-off between current consumption goods and future consumption goods. This curve shows that as more current consumption is chosen, the curve becomes steeper, meaning the opportunity cost of future consumption is increasing. The point where the curve intersects with the budget constraint represents the optimal point where the consumer can maximize their utility given their budget constraints. The other options either do not include a curve graph or show a linear relationship between current and future consumption, which is not representative of the optimal trade-off.

Quiz 17: Money in the Open Economy