Money and Payment Systems Chapter 3
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Questions and Answers

What is the primary role of money in an economy?

  • To facilitate the process of exchange (correct)
  • To measure the relative worth of goods and services
  • To act as a store of value
  • To create a scarcity of goods and services

What is the primary function of money as a unit of account?

  • To provide a standard unit of measurement for the value of goods and services (correct)
  • To act as a medium of exchange
  • To facilitate credit transactions
  • To store value over time

What is the primary characteristic of money that allows it to be easily transported?

  • Portability (correct)
  • Recognizability
  • Standardizability
  • Divisibility

What is the primary problem that arises in a pure barter economy?

<p>The double coincidence of wants (C)</p> Signup and view all the answers

What is the primary function of money as a store of value?

<p>To transport purchasing power from one time period to another (B)</p> Signup and view all the answers

What is the primary characteristic of money that ensures its value remains stable over time?

<p>Stability (B)</p> Signup and view all the answers

What is a necessary condition for a barter economy to exist?

<p>The presence of two individuals who own and desire to trade goods and services (B)</p> Signup and view all the answers

What is a shortcoming of a pure barter economy?

<p>The absence of a standardized unit of value (C)</p> Signup and view all the answers

What is the primary difference between commodity money and full-bodied money?

<p>Full-bodied money has a face value equal to its market value (A)</p> Signup and view all the answers

What is an example of a commodity that was used as a form of money in the past?

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

Why did people start using metals like gold and silver as commodity money?

<p>Because of the advancement in knowledge during the industrial revolution (D)</p> Signup and view all the answers

What is the purpose of a trading post in a barter economy?

<p>To eliminate the problem of double coincidence of wants (A)</p> Signup and view all the answers

What is the significant difference between token money and fiat money?

<p>Token money has a lower metallic value than its face value. (A)</p> Signup and view all the answers

Which of the following is an example of a commodity standard?

<p>Gold and silver used as exchange for goods and services (D)</p> Signup and view all the answers

What is the primary function of a debit card?

<p>To electronically transfer funds from the user's bank account to a merchant's account (B)</p> Signup and view all the answers

What is the key characteristic of fiat money?

<p>Its value is higher than its metallic value (D)</p> Signup and view all the answers

What is an example of bank money?

<p>Cheques issued by banks (D)</p> Signup and view all the answers

What is the main difference between a debit card and a stored-value card?

<p>Debit cards draw from the user's bank account, while stored-value cards contain a fixed amount of digital cash (A)</p> Signup and view all the answers

What is the primary function of a smart card?

<p>To hold digital cash that can be loaded from various sources. (C)</p> Signup and view all the answers

What is the primary benefit of using e-cash?

<p>It allows users to pay bills directly over the Internet. (A)</p> Signup and view all the answers

What is the function of an electronic wallet?

<p>To carry out all the functions of a standard wallet. (A)</p> Signup and view all the answers

How can a consumer obtain e-cash?

<p>By setting up an account with a bank that has Internet links. (B)</p> Signup and view all the answers

What is the process of sending an electronic check?

<p>The user has their PC write the equivalent of a check and sends it to the recipient. (D)</p> Signup and view all the answers

What is the name of the company that started testing smart cards in 1995?

<p>Mondex Corp. (B)</p> Signup and view all the answers

Flashcards

Electronic Cash (e-Cash)

A type of electronic money used to purchase goods or services on the internet.

Stored-Value Card

A digital cash card containing a fixed amount of money that can be reloaded.

Smart Card

A card with a computer chip that allows users to make purchases by transferring funds electronically from their bank accounts.

Electronic Check

A method of payment that replaces paper checks with electronic equivalents sent over the internet.

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Medium of Exchange

A medium used to buy and sell goods and services.

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Store of Value

A medium used to store purchasing power over time.

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Unit of Account

A standard unit of measurement for the value of goods and services.

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Standard of Deferred Payment

A method for facilitating the process of getting and paying credit/debt.

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Portability

The ease of carrying money from one place to another.

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Durability

The ability of money to withstand wear and tear over time.

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Divisibility

The ability to divide money into smaller units.

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Standardizability

Consistency in form and value across units of money.

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Recognizability

The ease of recognizing money as legitimate and valid.

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Acceptability

General acceptance and willingness to use money for transactions.

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Stability

The stability of the purchasing power of money over time.

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Scarcity

A limited supply of money to maintain its value.

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Barter Economy

Direct exchange of goods and services for other goods and services, without using money.

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Commodity Money

Physical commodities used as money, having intrinsic value equal to their face value.

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Token Money

Money whose metallic value is lower than its face value.

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Fiat Money

Money with a commodity value much less than its value as money.

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Debit Cards

Cards that allow users to purchase goods by directly transferring funds from their bank accounts to a merchant's account.

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Pure Barter Economy

A system where goods and services are exchanged without using money.

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Commodity Money Economies

The use of precious metals, like gold and silver, as money.

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Minted Coins with Nonmonetary Values

Minted coins where the face value is equal to the market value of the metal.

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Study Notes

Types of Stored-Value Cards

  • A smart card contains a computer chip that can be loaded with digital cash from an owner's bank account whenever needed.
  • Smart cards can be loaded from ATM machines, personal computers, or specially equipped telephones.
  • Example: London-based Mondex Corp., started running tests in 1995, allowing funds to be transferred between consumers and retailers or between individuals.

Electronic Cash (e-Cash)

  • A form of electronic money that can be used on the Internet to purchase goods or services.
  • A consumer gets e-cash by setting up an account with a bank that has links to the Internet and then has the e-cash transferred to their PC.

Electronic Checks

  • Allow users of the Internet to pay their bills directly over the Internet without sending a paper check.
  • The user writes the equivalent of a check and then sends the electronic check to the other party, who in turn sends it to their bank.

Functions of Money

  • Medium of Exchange: a medium that can be used to buy and sell goods and services.
  • Store of Value: an asset that can be used to transport purchasing power from one time period to another.
  • Unit of Account: a standard unit that provides a consistent way of quoting prices.
  • Standard of Deferred Payment: facilitates the process of getting and paying credit/debt.

Properties (Characteristics) of Money

  • Portability
  • Durability
  • Divisibility
  • Standardizability
  • Recognizability
  • Acceptability
  • Stability
  • Scarcity

Evolution of Money

Barter Economies

  • Pure Barter Economies: direct exchange of goods and services for other goods and services.
  • Three shortcomings of a pure barter economy:
    • Absence of a method of storing generalized purchasing power.
    • Absence of a common unit of measure and value.
    • Absence of a designated unit to use in writing contracts requiring future payments.

Commodity Money Economies

  • Commodity money: physical commodities used as money, having intrinsic or physical value equal to their face value.
  • Examples: wool, boats, sheep, and corn.
  • Later, people used metals like gold and silver, especially since the onset of the industrial revolution in the 1800s.

Commodity Standards

  • Minted coins with nonmonetary values developed, with face value equal to market value.
  • Token money: money whose metallic value is lower than its face value.

Fiat Money

  • Money with a commodity value much less than its value as money.
  • Examples: coins and paper money issued by the central bank.
  • Fiat money can be issued by the government (like coins and notes) and depositary institutions (like cheques, credit cards).

Electronic Monies (e-Money)

  • Debit Cards: enable users to purchase goods by electronically transferring funds directly from their bank accounts to a merchant's account.
  • Stored-Value Card: contains a fixed amount of digital cash, with the simplest example being prepaid cards.

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Test your knowledge of the role and functions of money in the payment system, including its uses as a medium of exchange, unit of account, and store of value.

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