Question 1

What do we mean in our current banking system when we say that a currency is "fractionally backed"?

Accepted Answer

Banks have many more claims outstanding against them than they have reserves available to pay those claims.

Question 2

Suppose an economy has two types of money - gold and silver coins - that are both legal tender but have different non-monetary values.Gresham's law has come into effect when

Accepted Answer

Gresham's law states that "bad money drives out good" in a situation where two forms of commodity money are in circulation and one is valued more highly than the other. When Gresham's law is in effect, the higher-valued coin (the "good" money) tends to disappear from circulation because people prefer to hoard it or use it in transactions where its full value is recognized, leaving the lower-valued coin (the "bad" money) as the primary medium of exchange.

Question 3

Which of the following is consistent with the predictions of Gresham's law?

Accepted Answer

Gresham's law states that "bad money drives out good," meaning that when there are two forms of currency circulating at the same time, people will hoard and use the more valuable one and spend the less valuable one. This is exactly what happens in the case of U.S.coins circulating in Canada during periods of a weakened Canadian dollar. Canadians hoard and use the U.S.coins, which are more valuable, and the Canadian coins disappear from circulation.

Question 4

Which of the following is a common definition of money?

Accepted Answer

Money is generally defined as a medium of exchange that is widely accepted in transactions.

Question 5

Gresham's law predicts which of the following?

Accepted Answer

Gresham's law states that "bad money drives out good," meaning that when both debased and undebased money are in circulation, people tend to hoard the undebased money and spend the debased money, leading to the undebased money being driven out of circulation.

Question 6

Suppose you come into possession of two "silver" dollars,one minted in the 1950s which contains a lot of silver,the other minted in the 2000s which contains no silver at all.The legal exchange rate between the coins is fixed at one for one.According to Gresham's law,the 1950s silver dollar

Accepted Answer

According to Gresham's law, "bad money drives out good." People will hoard the 1950s silver dollar (good money) and use the 2000s dollar (bad money) for transactions, making the 1950s dollar less likely to be used as a medium of exchange.

Question 7

Other things being equal,a rise in the price level will

Accepted Answer

When the price level rises, the purchasing power of money decreases because the same amount of money can buy fewer goods and services. Therefore, option B is the correct answer. Option A is incorrect because when the price level rises, the value of money decreases. Option C is incorrect because a rise in the price level can cause instability in the value of money. Option D is incorrect because a rise in the price level decreases the purchasing power of money. Option E is incorrect because a rise in the price level has an effect on the value of money.

Question 8

Which of the following was the most important initial step in the evolution of paper currency?

Accepted Answer

Goldsmiths' receipts were essentially notes that represented a specific amount of gold held by the goldsmith. These receipts were accepted as a form of payment and served as an early form of paper currency. The acceptance of these receipts paved the way for later developments in paper currency such as bank notes and government-issued currency.

Question 9

When you are estimating your monthly income and expenses,money is being used as

Accepted Answer

Money is acting as a unit of account when we use it to estimate our monthly income and expenses. We are using money to quantify and measure the value of our income and expenses in a standardized way.

Question 10

When metal coins,such as gold and silver,were used as money,a technique which helped to prevent the reduction of their value through clipping was

Accepted Answer

Milling involved putting ridges or patterns on the edges of coins, which made it more difficult to shave off small amounts of metal from the edges without being detected. This helped to prevent the reduction of their value through clipping.

Question 11

The major problem of a currency that is fractionally backed and convertible into a precious metal is that of

Accepted Answer

The major problem with a currency that is fractionally backed and convertible into a precious metal is maintaining its convertibility into the metal. If there are not enough reserves of the precious metal to back up the currency, then holders of the currency may begin to doubt its value and demand conversion into the metal, which could lead to a run on the reserves and a collapse of the currency system.

Question 12

In order to be considered "money," paper currency must be

Accepted Answer

Paper currency must be generally acceptable as a medium of exchange in order to be considered money. While some money was previously convertible into a precious metal, this is no longer a requirement. Similarly, while counterfeit prevention is important, it is not the defining characteristic of money. Money can be issued by a chartered bank or government agency, but this is not a requirement for it to be money.

Question 13

The use of money in an economy does which of the following?

Accepted Answer

The use of money in an economy promotes specialization and the division of labour by allowing people to trade their specialized skills or products for money, which they can then use to purchase other goods and services they need or desire. It eliminates the need for a double coincidence of wants and makes it easier to trade even indivisible commodities. Money does not solve the problem of inflation nor does it promote the use of barter.

Question 14

Other things being equal,the purchasing power of money is

Accepted Answer

The purchasing power of money refers to the amount of goods and services that can be purchased with a given amount of money. As the price level increases, the purchasing power of money decreases because it can buy fewer goods and services. Therefore, the purchasing power of money is inversely related to the price level.

Question 15

What is the biggest disadvantage of a barter system compared to a system that uses money?

Accepted Answer

The biggest disadvantage of a barter system is the requirement for a double coincidence of wants, meaning each party must have what the other wants and be willing to trade for it, which is significantly less efficient than using money as a medium of exchange.

Question 16

Which of the following is an example of the use of money as a medium of exchange?

Accepted Answer

Barry is using his bank debit card as a medium of exchange to purchase the NHL playoff tickets. Money serves as a medium of exchange when it is used to buy goods or services, as is the case in this scenario. Choices A, B, C, and E do not involve the actual exchange of money for goods or services.

Question 17

Historically,when gold and silver coins were used as money,their debasement resulted in

Accepted Answer

Debasement of gold and silver coins, which involved reducing the precious metal content in coins while keeping their face value constant, led to an increase in the supply of money. This is because more coins could be produced from the same amount of gold or silver, effectively inflating the currency.

Question 18

Doug is saving money in order to purchase a new snowboard next winter.This represents using money as

Accepted Answer

Doug is using money as a store of value, as he is saving money over time in order to purchase a snowboard in the future.

Question 19

Doug compares the unit price of chocolate bars in order to get the "best buy." This represents using money as

Accepted Answer

Using money as a unit of account means using it as a means of measuring value in order to compare prices and determine the best buy. Doug is comparing the unit price of chocolate bars, which is an example of using money as a unit of account. The other choices are not relevant to the situation described.

Question 20

What is the major advantage of using money as opposed to barter?

Accepted Answer

The use of money significantly reduces transactions costs compared to barter, where there is no way to express values of commodities and direct exchange often involve much time and effort to negotiate and determine the relative values of goods being exchanged.

Quiz 26: Money and Banking