Economics Chapter 2: Money and Payments System
40 Questions
0 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to Lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is the primary characteristic of money that differentiates it from other assets?

  • It appreciates over time.
  • It can be stored as wealth.
  • It is a means of payment. (correct)
  • It has a fixed value.

    • Which of the following best describes the relationship between money and inflation?

  • Inflation is not related to the value of money.
  • Money acts as a store of value during inflation.
  • Money decreases in value during inflation. (correct)
  • Inflation only affects stocks and bonds.

    • What does liquidity measure in relation to money or assets?

  • The historical performance of the asset.
  • The ease of converting the asset into cash. (correct)
  • The growth rate of the asset.
  • The total value of the asset.

    • Why is using money preferable to barter in transactions?

    <p>It simplifies exchanges by removing the double coincidence of wants. (A)</p> Signup and view all the answers

    Which function of money allows it to be used to set prices and record debts?

    <p>Unit of account. (D)</p> Signup and view all the answers

    What happens when a credit card is not paid in full on time?

    <p>It incurs interest on the remaining balance. (B)</p> Signup and view all the answers

    How does paper currency serve as a store of value despite its potential degradation?

    <p>It is accepted at face value in transactions. (A)</p> Signup and view all the answers

    What is a key advantage of holding money compared to other forms of wealth?

    <p>It is liquid and easily accessible for transactions. (D)</p> Signup and view all the answers

    What determines the liquidity of an asset?

    <p>The cost to convert the asset into money (A)</p> Signup and view all the answers

    What role does money play in the payments system?

    <p>It is central to the efficient operation of the economy. (B)</p> Signup and view all the answers

    Which of the following is NOT a property of successful commodity money?

    <p>Market exclusivity (C)</p> Signup and view all the answers

    What significant event caused the US to revert to using gold as money after the Civil War?

    <p>The decline in trust towards paper money (B)</p> Signup and view all the answers

    Why is paper money referred to as fiat money?

    <p>Its value is based on government decree. (D)</p> Signup and view all the answers

    What distinguishes a check from final currency payment?

    <p>A check initiates a series of transactions. (B)</p> Signup and view all the answers

    Which payment method involves direct instructions to transfer funds from one account to another?

    <p>Checks (D)</p> Signup and view all the answers

    What is the most common form of electronic funds transfers?

    <p>Automated Clearinghouse (ACH) transactions (B)</p> Signup and view all the answers

    What is the relationship between funding liquidity and market liquidity?

    <p>Funding liquidity involves borrowing money to buy securities. (D)</p> Signup and view all the answers

    What characteristic does not apply to commodity money such as gold?

    <p>It is backed by government guarantees. (D)</p> Signup and view all the answers

    What is a characteristic of stored-value cards?

    <p>They require specific hardware by businesses. (C)</p> Signup and view all the answers

    Which statement about e-money is true?

    <p>E-money is a form of private money. (A)</p> Signup and view all the answers

    Which function of money is predicted to disappear due to electronic transactions?

    <p>Means of payment (A)</p> Signup and view all the answers

    What is a distinguishing feature of airtime minutes used as mobile money in Africa?

    <p>They can be sent anonymously and immediately. (C)</p> Signup and view all the answers

    What distinguishes a credit card from a debit card?

    <p>Credit cards are a promise to lend money. (C)</p> Signup and view all the answers

    What has contributed to the increased use of debit cards after 2007?

    <p>Changes in consumer payment preferences. (B)</p> Signup and view all the answers

    Which factor is NOT related to changes in the quantity of money?

    <p>Government spending. (D)</p> Signup and view all the answers

    Which of the following is true about electronic payments?

    <p>They include forms like credit and debit cards. (D)</p> Signup and view all the answers

    What primary cause of inflation is discussed?

    <p>Too much money circulating. (D)</p> Signup and view all the answers

    How is M1 different from M2 in measuring money supply?

    <p>M1 comprises only the most liquid assets. (A)</p> Signup and view all the answers

    What happens to the purchasing power of money during inflation?

    <p>It declines as prices rise. (B)</p> Signup and view all the answers

    Which monetary aggregate became more useful for understanding inflation in the early 1980s?

    <p>M2 (A)</p> Signup and view all the answers

    Which of the following is NOT considered a preferred feature of a payment mechanism?

    <p>Limited transfer options. (A)</p> Signup and view all the answers

    What does measuring the money supply help to understand about the economy?

    <p>It relates to interest rates, economic growth, and inflation. (A)</p> Signup and view all the answers

    What proportion of GDP does M2 represent?

    <p>Close to one-half (D)</p> Signup and view all the answers

    Why might M2 no longer be seen as a reliable predictor of inflation?

    <p>Its effectiveness may only apply at high levels of inflation. (B)</p> Signup and view all the answers

    What does the Consumer Price Index (CPI) measure?

    <p>The cost of purchasing a fixed basket of goods and services over time. (C)</p> Signup and view all the answers

    What is the formula to calculate CPI?

    <p>CPI = (Cost of Basket in Current Year / Cost of Basket in Base Year) * 100 (D)</p> Signup and view all the answers

    Which factor was associated with the public holding about $1.2 trillion in US currency in 2013?

    <p>Most of the money was in $100 bills. (A)</p> Signup and view all the answers

    What was a notable historical trend regarding the correlation between M2 and inflation?

    <p>No correlation observed from 1990 to 2000. (D)</p> Signup and view all the answers

    What is a condition for low inflation levels according to the content?

    <p>Low levels of money growth. (A)</p> Signup and view all the answers

    What aspect of money is considered no longer useful as a forecasting tool?

    <p>M1 (C)</p> Signup and view all the answers

    Flashcards

    Money's Functions

    Money serves as a medium of exchange, a unit of account, and a store of value.

    Means of Payment

    Money allows for smooth transactions by eliminating the need for the "double coincidence of wants" in barter.

    Unit of Account

    Money is used to measure and compare the values of goods and services.

    Store of Value

    Money can hold its value over time, although other assets may be better.

    Signup and view all the flashcards

    Debit Card

    A debit card immediately removes funds from your account when used.

    Signup and view all the flashcards

    Credit Card

    A credit card allows for deferred payments, potentially with interest if not paid in full.

    Signup and view all the flashcards

    Liquidity

    Liquidity measures how easily an asset can be converted to cash.

    Signup and view all the flashcards

    Barter System

    Direct exchange of goods or services without using money.

    Signup and view all the flashcards

    Liquidity of an asset

    How easily an asset can be converted into money.

    Signup and view all the flashcards

    Market Liquidity

    The ability to easily sell assets for cash.

    Signup and view all the flashcards

    Funding Liquidity

    The capacity to borrow money to buy assets or make loans.

    Signup and view all the flashcards

    Payments system

    The system that allows the exchange of goods, services, and assets.

    Signup and view all the flashcards

    Commodity money

    Money with intrinsic value, like silk or salt.

    Signup and view all the flashcards

    Fiat money

    Money whose value comes from government decree.

    Signup and view all the flashcards

    Check

    An instruction to a bank to move funds from one account to another.

    Signup and view all the flashcards

    Financial Institution

    A business that deals with money and investments (like a bank).

    Signup and view all the flashcards

    Paper Check

    A written instruction to a bank to transfer funds from the check writer's account to the recipient.

    Signup and view all the flashcards

    Electronic Funds Transfer (EFT)

    Direct movement of funds between accounts electronically, often used for recurring payments like utility bills.

    Signup and view all the flashcards

    Stored-Value Card

    A card preloaded with a specific amount of money, used for purchases until the balance is depleted.

    Signup and view all the flashcards

    E-money

    Digital money used for online and mobile purchases, typically requiring an account to hold the funds.

    Signup and view all the flashcards

    Mobile Money

    A system using mobile phones for financial transactions, often utilizing prepaid minutes.

    Signup and view all the flashcards

    Inflation

    The general increase in prices of goods and services over time.

    Signup and view all the flashcards

    Inflation Rate

    The percentage change in the price level over a specific period, usually a year.

    Signup and view all the flashcards

    Money Aggregates

    Measures of the money supply, classified by their liquidity – how easily they can be used for transactions.

    Signup and view all the flashcards

    M1

    The narrowest money aggregate, including only the most liquid assets like cash and checking accounts.

    Signup and view all the flashcards

    M2

    A broader money aggregate including M1 plus less liquid assets like savings deposits and money market funds.

    Signup and view all the flashcards

    Which Money Aggregate Measures Inflation?

    M2 is used to understand inflation, as it reflects a broader range of monetary assets.

    Signup and view all the flashcards

    M2: Good measure of money?

    M2, a broader measure of money, includes M1 plus savings accounts, time deposits, and money market funds. It often reflects the overall money supply in the economy.

    Signup and view all the flashcards

    M2 vs Inflation

    Historically, there was a correlation between rapid growth in M2 and high inflation. However, this relationship has weakened in recent times.

    Signup and view all the flashcards

    Why M2 no longer predicts inflation?

    Several reasons could explain why M2 no longer consistently predicts inflation. One possibility is that the relationship is only valid at higher inflation levels, or only after long periods.

    Signup and view all the flashcards

    CPI: Measuring inflation

    The Consumer Price Index (CPI) measures how much more expensive it is today to buy the same goods and services compared to a fixed point in the past.

    Signup and view all the flashcards

    How to calculate CPI

    CPI is calculated by comparing the cost of a specific basket of goods and services in the current year to the cost of the same basket in a base year.

    Signup and view all the flashcards

    Inflation rate calculation

    The inflation rate is calculated as the percentage change in CPI between two periods. It measures the rate at which prices are increasing.

    Signup and view all the flashcards

    US currency: Global presence

    A significant amount of US currency is held outside the United States, often in countries with less stable currencies.

    Signup and view all the flashcards

    Stable currencies

    People in other countries hold more stable currencies, like the US dollar, as a way to protect their savings from economic instability.

    Signup and view all the flashcards

    Study Notes

    Chapter 2: Money and the Payments System

    • This chapter examines money, its functions, the payments system, and the intricate link between money, economic factors such as inflation and economic growth. A thorough understanding of these concepts is crucial for students, as they are foundational to the study of economics and finance.

    Learning Objectives

    • Students will gain an understanding of the multifaceted nature of money and its functions in various economic contexts.
    • Students will understand the payments system's current state, its historical evolution, and anticipated future developments.
    • Students will learn the mechanisms through which money influences inflation and economic growth, preparing them to analyze real-world economic conditions critically.

    Money and How We Use It

    • Money is an asset that is generally accepted as a medium for payment of goods and services or for the repayment of debts. It serves as a fundamental tool for facilitating economic transactions, contributing to overall economic efficiency.
    • Income is characterized as the continuous flow of earnings generated over time from various sources, such as wages and investments. In contrast, wealth refers to the net value of an individual's or entity's assets after subtracting liabilities, indicating overall financial health. Thus, money is a crucial component in both concepts.
    • Money possesses three key characteristics: it functions as a means of payment, a unit of account, and a store of value. Among these, the means of payment characteristic is of utmost importance because it enables transactions to occur seamlessly in an economy.

    Means of Payment

    • Individuals and businesses typically prefer transactions to be carried out using money due to its recognized value and efficiency.
    • In a barter system, where goods and services are exchanged directly for other goods and services, there is a requirement for a double coincidence of wants. This means that each party must desire what the other has to offer, complicating the process of trade.
    • The use of money significantly simplifies transactions and eliminates ongoing claims or liabilities between buyers and sellers, especially in contexts where exchange activity is high, allowing for smoother and more efficient commerce.
    • Money plays a crucial role in facilitating transactions in markets characterized by multiple buyers and sellers, as it serves as a common reference point that enhances market fluidity.

    Unit of Account

    • Money allows for the quoting of prices and the recording of debts, acting as a standard of value against which various goods and services can be compared and measured.
    • Prices, expressed in monetary terms, are vital as they guide the allocation of resources, ensuring that they are directed towards their most efficient uses within the economy.
    • The use of a common currency, such as the U.S. dollar, greatly simplifies price comparisons, enabling consumers and businesses to make informed decisions based on relative costs.

    Debit Cards versus Credit Cards

    • Debit cards are a modern payment method that functions similarly to checks, but they offer the significant advantage of being faster, as they instantly deduct funds from a bank account at the time of the transaction.
    • Credit cards, on the other hand, provide a mechanism for deferred payment, allowing consumers to make purchases immediately and repay the cost at a later date. However, failure to make timely payments may result in additional fees and accruing interest, creating potential financial strain. Credit cards often include interest-free periods, provided the balance is paid in full within the designated time frame. Additionally, responsible usage of credit cards is beneficial for building a positive credit history, which is essential for larger future financial investments.

    Store of Value

    • A means of payment must be durable, retaining its value so that it can transfer purchasing power over time and be used for transactions in the future.
    • Although paper currency is subject to degradation over time, it still maintains its face value, enabling continued usage in economic transactions.
    • Other forms of stores of value exist beyond cash, including investments such as stocks, bonds, and real estate, which can also provide financial security and asset appreciation.
    • Liquidity is a critical measure that indicates how readily an asset can be converted into money. The higher the costs associated with converting an asset into currency, the lower its liquidity will be.
    • Market liquidity refers to the capability of selling assets quickly for cash without significant loss of value, while funding liquidity relates to the ease with which a firm or individual can obtain financing for investments or other expenses.

    The Payments System

    • The payments system is an essential framework that facilitates the exchange of goods, services, and financial assets among individuals and businesses.
    • A functional economy is heavily reliant on an efficient payments system, as it supports all forms of economic activity by enabling smooth transactions.
    • Money is a fundamental component of the payments system, serving as its core element for transactions.

    Possible Methods of Payment

    • Different methods of payment include commodity money and fiat money, each with unique characteristics and implications for the economy.
    • Checks are another traditional form of payment that operates through banking systems.
    • In modern commerce, electronic payments have emerged as a predominant method of transacting, reflecting technological advancement and consumer preferences.

    Commodity and Fiat Monies

    • Commodity monies possess intrinsic value, which can be derived from the material used to create them, such as silk, salt, or gold, making them valuable apart from their role as money.
    • Successful commodity monies share several key characteristics: they must be usable in transactions, quantifiable for pricing, durable through time, transportable between locations, and divisible into smaller units for various transaction sizes.
    • Throughout history, gold has been a particularly common form of commodity money due to its inherent properties of durability and universal acceptance.
    • Early instances of paper money often encountered challenges and failures primarily attributed to excessive issuance, demonstrating the necessity for responsible monetary policy.
    • Fiat money derives its value from government decree, with individuals and businesses accepting it based on the trust that the government will maintain its value. This belief in the stability and backing of fiat money plays a significant role in its acceptance and overall functionality.
    • Trust is paramount in the concept of money, as a lack of confidence in a currency can lead to rapid devaluation and inefficiencies in the economy.

    Checks

    • Checks are essentially written instructions addressed to banks, authorizing the transfer of funds between different accounts per the directions of the issuer.
    • While checks initiate a series of related transactions, it is important to note that they do not represent immediate payment, as the transfer can take some time to process through banks.

    Electronic Payments

    • Electronic payments encompass a range of modern payment methods, which include credit cards, electronic fund transfers, stored-value cards, and e-money operations.
    • Debit cards operate similarly to checks, allowing for direct transactions by linking to the user's bank account for immediate deduction of funds.
    • Credit cards function as a commitment from a bank to lend money for a purchase, allowing consumers to access funds that they may not already have at their disposal, effectively deferring payment until later.
    • Automated Clearing House (ACH) transactions represent a network for processing standardized electronic payments, facilitating such transfers securely and efficiently.
    • In the banking sector, Fedwire is utilized to facilitate immediate and secure transfers between banks and other electronic transfer processes to ensure efficient movement of funds across accounts.
    • Stored-value cards are a modern solution for transferring money and completing purchases using a physical card, often preloaded with a specific sum of money.
    • E-money refers to digital money used for online transactions, which does not necessitate a central banking guarantee, offering consumers flexibility in virtual purchases.

    The Future of Money

    • As technology evolves, electronic transactions may increasingly diminish the reliance on physical forms of payment, leading to a significant transformation in how consumers conduct their financial affairs.
    • The unit of account will likely remain a stable measure, allowing for efficient appreciation of values and consistent pricing in economy.
    • Conversely, the store of value aspect of money may lessen as the variety of financial instruments become progressively more liquid and accessible, providing alternative methods for preserving wealth.

    Measuring Money

    • Changes in the overall quantity of money within an economy can significantly affect factors such as interest rates, economic growth, and inflation levels, making accurate measurements crucial.
    • Inflation is characterized as the process of rising prices, where the inflation rate serves as a metric to quantify this phenomenon. During periods of inflation, users inevitably need to spend more money to acquire the same basket of goods compared to previous periods. A common explanation for inflation is the overproduction of money in relation to the goods available in the economy.
    • The money supply can be quantified using various metrics, as liquidity can be assessed in different degrees, illustrating the varying influences on economic dynamics.
    • Money aggregates, such as M1 and M2, are classifications that represent different measures of the money supply, with M2 capturing a broader range of assets compared to M1, thus providing a more comprehensive view of monetary availability.

    The Consumer Price Index (CPI)

    • The Consumer Price Index (CPI) serves as a vital economic indicator that measures the changes in the cost of a prescribed basket of goods and services over a specified period.
    • The CPI is meticulously calculated through a survey of consumer purchases across specified categories of goods and services, with the collected data used to determine the percentage change in prices, providing insights into inflation and cost of living adjustments.

    Studying That Suits You

    Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

    Quiz Team

    Related Documents

    Chapter 2: Money and Payments System PDF

    Description

    This quiz explores the concepts of money and its essential functions within the payments system. It focuses on how money interacts with inflation, economic growth, and examines the characteristics that make money a preferred medium of exchange. Understand the critical role of money in economics and its impact on various financial transactions.

    More Like This

    Use Quizgecko on...
    Browser
    Open
    Browser
    Browser