Question 1

Money facilitates trade because it:

Accepted Answer

Money facilitates trade primarily because it eliminates the need for a double coincidence of wants, which is a situation where two parties each desire exactly what the other has to offer. By serving as a common medium of exchange, money allows individuals to trade goods and services indirectly, simplifying transactions.

Question 2

When a clerk gives you a pair of jeans for your $50 bill, money is serving which function?

Accepted Answer

Money is serving as a medium of exchange in this scenario because it is being used to facilitate the transaction between the clerk and the customer for the pair of jeans.

Question 3

During periods of high inflation, money becomes:

Accepted Answer

During periods of high inflation, money loses its value quickly, making it less reliable for pricing goods and services over time, thus becoming less useful as a unit of account.

Question 4

When you stuff dollar bills under your mattress, knowing that they will be there next year to help buy your next major purchase, money is serving which function?

Accepted Answer

Storing dollar bills under a mattress for future use exemplifies money's function as a store of wealth, meaning it retains value over time and can be used to make purchases in the future.

Question 5

The financial liability that makes the real economy function smoothly for its liquidity and its acceptability is called:

Accepted Answer

Money is the financial liability that is essential for the smooth functioning of the real economy due to its liquidity and widespread acceptability. It serves as a medium of exchange, a unit of account, and a store of value, facilitating transactions and economic activities.

Question 6

In Book 23 of Homer's Iliad are these words: "The winner was to acquire a fire-straddling tripod valued at twelve oxen by the Akhaians. As for the loser, in their midst Akhilleus placed a woman versatile at crafts, whose value was four oxen." What does this passage tell us about economics in the Iliad?

Accepted Answer

The passage indicates that oxen were used as a unit of account, a way to measure and compare the value of different items or prizes, in this case, a tripod and a woman skilled in crafts.

Question 7

In order to function as a medium of exchange, money must:

Accepted Answer

For money to function as a medium of exchange, it must be widely accepted by people in exchange for goods and services. The backing by gold or other precious commodities (A and C) is not a necessity for modern fiat money systems. Similarly, maintaining a constant value over time (B) is ideal but not strictly necessary for money to serve as a medium of exchange.

Question 8

People living in the town of Norwich, England, have begun a system of trade called the LETS, which allows people to enter into exchanges without using the British pound. Members offer a particular service, such as babysitting, gardening, and plumbing for which they get Croy credits. They can then use these Croys to buy services from other people. Does this system represent what economists call barter?

Accepted Answer

The LETS system in Norwich does not represent traditional barter because it introduces an intermediary (the Croy) to facilitate exchanges, effectively replacing one form of money (the pound) with another medium of exchange (the Croy), rather than directly swapping goods or services.

Question 9

Which of the following is not one of the functions of money?

Accepted Answer

The primary functions of money are to serve as a medium of exchange, a unit of account, and a store of wealth. "Standard of well-being" is not considered a function of money.

Question 10

When money is used to set the value of goods such as cars, and TVs, money is serving as a:

Accepted Answer

Money serves as a unit of account when it is used to measure and compare the value of goods and services. This function allows for a common basis for prices, making it easier to set and understand the value of items like cars and TVs.

Question 11

Non-liquid assets could perform which of the following functions?

Accepted Answer

Non-liquid assets can serve as a store of value, preserving wealth over time, but they are not easily used for transactions or as a medium of exchange.

Question 12

Money is a unit of account because:

Accepted Answer

Money serves as a unit of account, meaning it provides a common measure for valuing goods and services. This allows for the consistent pricing of goods and assets in terms of money, facilitating comparison and exchange.

Question 13

When you deposit $200 in your savings account with the objective of withdrawing it later to buy a video game that is about to be offered in the market in the near future, then the $200 is serving which function?

Accepted Answer

The $200 deposited in a savings account to be used later for purchasing a video game serves as a store of wealth. This means the money is being saved or stored for future use, retaining its value over time until it's needed for the purchase.

Question 14

One of the three functions of money is to serve as a:

Accepted Answer

Money serves as a financial asset because it holds value and can be used to purchase goods and services or to pay off debts. Unlike real assets, which are physical or tangible assets like property or equipment, financial assets represent a claim on future benefits or services.

Question 15

The value and functionality of money are determined by the:

Accepted Answer

The value and functionality of money primarily hinge on its general acceptability to other people. This acceptability ensures that money can be used as a medium of exchange, a unit of account, and a store of value.

Question 16

Which of the following is not a necessary characteristic of money?

Accepted Answer

For money to function effectively in an economy, it must not be available in unlimited supply. If money were unlimited, it would lose its value due to inflation. The scarcity of money is what gives it value, ensuring that it can serve as a medium of exchange, a unit of account, and a store of value. The other characteristics listed (difficult to counterfeit, durable, and divisible) are indeed necessary for money to be practical and reliable in everyday transactions.

Question 17

-In Ithaca, NY, Ithaca Hours, valued at the area's average hourly wage ($10), can be used to buy goods and pay for services. About 5,700 Ithaca Hours are in circulation. Because they are accepted in local stores and accepted by local people as income, Ithaca Hours:

Accepted Answer

Ithaca Hours are considered money because they are accepted as a medium of exchange within the community, fulfilling one of the key functions of money, despite being less liquid than traditional currency like Federal Reserve Notes. The backing by the local government or the basis of their value does not disqualify them from being considered money.

Question 18

In POW camps during World War II, nearly everything was traded for cigarettes. For example, one bar of soap cost two cigarettes, and two candy bars cost four cigarettes. During the time of the POW camps, cigarettes:

Accepted Answer

Cigarettes functioned as money in POW camps because they were used as a unit of account (prices were denoted in cigarettes), a medium of exchange (goods and services were traded for cigarettes), and a store of wealth (cigarettes could be saved and used for transactions later), fulfilling the key roles of money even without government backing or controlled supply.

Question 19

An asset is best able to serve as a medium of exchange if it is:

Accepted Answer

An asset is best able to serve as a medium of exchange if it is liquid, meaning it can be easily and quickly converted into a widely accepted form of payment without losing value.

Question 20

When money is held as an asset, it is serving as a:

Accepted Answer

When money is held as an asset, it is primarily serving as a store of wealth. This means individuals hold money to preserve their purchasing power over time.

Quiz 28: The Financial Sector and the Economy