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Economics of Money & Banking

Course Code:
Economics E216
Dr. Walaa Wageh Diab
E-mail: [email protected]

1) Financial markets promote economic efficiency by

A. channeling funds from investors to savers.
B. creating inflation.
C. channeling funds from savers to investors.
D. reducing investment.

2) To an economist, ________ is anything that is generally accepted in payment for

goods and services or in the repayment of debt.
A. Wealth
B. Income
C. Money
D. Credit

3) Currency includes ________.

A) paper money and coins
B) paper money, coins, and cheques
C) paper money and cheques
D) aper money, coins, cheques, and savings depos

4) The total collection of pieces of property that serve to store value is a person's _
A) Wealth
B) Income
C) Money
D) credit
5) ________ is used to make purchases while ________ is the total collection of
pieces of property that serve to store value.

A. Money; income
B. Wealth; income
C. Income; money
D. Money; wealth
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6) ________ is a flow of earnings per unit of time.

A. Income
B. Money
C. Wealth
D. CurrencyAnswer

7) An individual's annual salary is her ________.

A. Money
B. Income
C. Wealth
D. Liabilities

8) When we say that money is a stock variable, we mean that ________.

A. the quantity of money is measured at a given point in time
B. we must attach a time period to the measure
C. it is sold in the equity market
D. money never loses purchasing power

9) The difference between money and income is that ________.

A. money is a flow and income is a stock
B. money is a stock and income is a flow
C. there is no difference—money and income are both stocks
D. there is no difference—money and income are both flows

10) Which of the following statements uses the economists' definition of money?
A. I plan to earn a lot of money over the summer.
B. Betsy is rich—she has a lot of money.
C. I hope that I have enough money to buy my lunch today.
D. The job with New Company gave me the opportunity to earn more money.

11) For a commodity to function effectively as money it must be ________

A. easily standardized, making it easy to ascertain its value
B. difficult to make change
C. deteriorate quickly so that its supply does not become too large
D. hard to carry around
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14) _______ are the time and resources spent trying to exchange goods and services.
A. Bargaining costs
B. Transaction costs
C. Contracting costs
D. Barter costs

15) Compared to an economy that uses a medium of exchange, in a barter economy ________.
A. transaction costs are higher
B. transaction costs are lower
C. liquidity costs are higher
D. liquidity costs are lower

16) When compared to exchange systems that rely on money, disadvantages of the barter
system include ________
A. the requirement of a double coincidence of wants
B. owering the cost of exchanging goods over time
C. lowering the cost of exchange to those who would specialize
D. encouraging specialization and the division of labor

17) The conversion of a barter economy to one that uses money _______

A. Increases efficiency by reducing the need to exchange goods and services

B. Increases efficiency by reducing the need to specialize
C. Increases efficiency by reducing transactions costs
D. Does not increase economic efficiency

18) Which of the following statements best explains how the use of money in an economy
increases economic efficiency?
A. Money increases economic efficiency because it is costless to produce.
B. Money increases economic efficiency because it discourages specialization.
C. Money increases economic efficiency because it decreases transactions costs.
D. Money cannot have an effect on economic efficiency.

19) Money ________ transaction costs, allowing people to specialize in what they do best.
A) reduces
B) increases
C) enhances
D) eliminates
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20) Kevin purchasing concert tickets with his debit card is an example of the ________
function of money.
A) medium of exchange
B) unit of account
C) store of value
D) specialization

21) When money prices are used to facilitate comparisons of value, money is said to
function asa ________.
A) unit of account
B) medium of exchange
C) store of value
D) payments-system ruler

22) A problem with barter exchange when there are many goods is that in a barter system
________.
A) transactions costs are minimized
B) there exists a multiple number of prices for each good
C) there is only one store of value
D) exchange of services is impossible

23) In a barter economy the number of prices in an economy with N goods is ________.
A) [N(N - 1)]/2
B) N(N/2)
C) 2N
D) N(N/2) - 1

24) If there are five goods in a barter economy, one needs to know ten prices in order to
exchange one good for another. If, however, there are ten goods in a barter economy, then
one needs to know ________ prices in order to exchange one good for another.
A) 20
B) 25
C) 30
D) 45
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25) Because it is a unit of account, money ________.

A) increases transaction costs
B) reduces the number of prices that need to be calculated
C) does not earn interest
D) discourages specialization

26) Dennis notices that jackets are on sale for $99. In this case money is functioning as a
________.
A) medium of exchange
B) unit of account
C) store of value
D) payments-system ruler

27) As a store of value, money ________.

A) does not earn interest
B) cannot be a durable asset
C) must be currency
D) is a way of saving for future purchase

28) Patrick places his pocket change into his savings bank on his desk each evening. By his
actions, Patrick indicates that he believes that money is a ________.
A) medium of exchange
B) unit of account
C) store of value
D) unit of specialization

29) ________ is the relative ease and speed with which an asset can be converted into a
medium of exchange.
A) Efficiency
B) Liquidity
C) Deflation
D) Specialization

28) Of the following assets, the least liquid is ________.

A) stocks
B) travellers cheques
C) chequing deposits
D) a house
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30) Ranking assets from most liquid to least liquid, the correct order is ________.
A) savings bonds; house; currency
B) currency; savings bonds; house
C) currency; house; savings bonds
D) house; savings bonds; currency

31) If the price level doubles, the value of money ________.

A) doubles
B) more than doubles, due to scale economies
C) rises but does not double, due to diminishing returns
D) falls by half

32) A fall in the level of prices ________.

A) does not affect the value of money
B) has an uncertain effect on the value of money
C) increases the value of money
D) reduces the value of money

33) A disadvantage of ________ is that it can be very heavy and hard to transport from one
placeto another.
A) commodity money
B) fiat money
C) electronic money
D) paper money

34) Paper currency that has been declared legal tender but is not convertible into coins or
precious metals is called ________ money.
A) commodity
B) fiat
C) electronic
D) funny

35) The evolution of the payments system from barter to precious metals, then to fiat money,
then to cheques can best be understood as a consequence of the fact that ________.
A) paper is more costly to produce than precious metals
B) precious metals were not generally acceptable
C) precious metals were difficult to carry and transport
D) paper money is less accepted than cheques
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36) The evolution of the payments system from barter to precious metals, then to fiat money, then
to cheques can best be understood as a consequence of ________.
A) government regulations designed to improve the efficiency of the payments system
B) government regulations designed to promote the safety of the payments system
C) innovations that reduced the costs of exchanging goods and services
D) competition among firms to make it easier for customers to purchase their products

37) Compared to an electronic payments system, a payments system based on cheques has the
major drawback that ________.
A) cheques are less costly to process
B) cheques take longer to process, meaning that it may take several days before the depositor
can get her cash
C) fraud may be more difficult to commit when paper receipts are eliminated
D) legal liability is more clearly defined

38) Which of the following sequences accurately describes the evolution of the payments system?
A) Barter, coins made of precious metals, paper currency, cheques, electronic funds transfers
B) Barter, coins made of precious metals, cheques, paper currency, electronic funds transfers
C) Barter, cheques, paper currency, coins made of precious metals, electronic funds transfers
D) Barter, cheques, paper currency, electronic funds transfers

39) E-cash is used for payments ________.

A) that are always secure
B) that are very important
C) on the internet
D) in any transaction

40) An electronic payments system has not completely replaced the paper payments system
because of all of the following reasons except ________.
A) expensive equipment is necessary to set up the system
B) security concerns
C) privacy concerns
D) transportation costs

41) One of the type of deposit accounts with the commercial banks is

A. Share holding
B. Savings account
C. Gold
D. Mutual fund
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42) One drawback of barter exchange is

A. Lack of trust
B. Lack of goods
C. Lack of double coincidence of wants
D. Lack of coincidence of wants

43) The nominal interest rate minus the expected rate of inflation
defines the real interest rate.
is a less accurate measure of the incentives to borrow and lend than is the nominal interest rate.
is a less accurate indicator of the tightness of credit market conditions than is the nominal
interest rate.
defines the discount rate.

44) The narrow definition of money is based on

A. Medium of payment function
B. Cant’ say
C. Store of value function
D. Transferability of money