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The Economics of Money, Banking, and Financial Markets

Frederic S. Mishkin

Chapter 3

What Is Money? - all with Video Answers

Educators


Chapter Questions

01:01

Problem 1

Why is simply counting currency an inadequate measure of money?

Prashant Bana
Prashant Bana
Numerade Educator
04:15

Problem 2

In prison, cigarettes are sometimes used among inmates as a form of payment. How is it possible for cigarettes to solve the "double coincidence of wants" problem,
even if a prisoner does not smoke?

Pragya Ahuja
Pragya Ahuja
Numerade Educator
02:58

Problem 3

Three goods are produced in an economy by three individuals:
$$\text {Good $\space$$\space$$\space$$\space$ Producer} $$
$$\text {Apples $\space$$\space$$\space$$\space$ Orchard owner} $$
$$\text {Bananas $\space$$\space$$\space$$\space$ Banana grower} $$
$$\text {Chocolate$\space$$\space$$\space$$\space$ Chocolatier} $$
If the orchard owner likes only bananas, the banana grower likes only chocolate, and the chocolatier likes only apples, will any trade between these three persons take place in a barter economy? How will introducing money into the economy benefit these three producers?

Crystal Wang
Crystal Wang
Numerade Educator
01:22

Problem 4

Why did cavemen not need money?

Pragya Ahuja
Pragya Ahuja
Numerade Educator
16:18

Problem 5

Most of the time it is quite difficult to separate the three functions of money. Money performs its three functions at all times, but sometimes we can stress one in particular. For each of the following situations, identify which function of money is emphasized.
a. Brooke accepts money in exchange for performing her daily tasks at her office, since she knows she can use that money to buy goods and services.
b. Tim wants to calculate the relative value of oranges and apples, and therefore checks the price per pound of each of these goods quoted in currency units.
c. Maria is currently pregnant. She expects her expenditures to increase in the future and decides to increase the balance in her savings account.

Pragya Ahuja
Pragya Ahuja
Numerade Educator
02:38

Problem 6

In Brazil, a country that underwent a rapid inflation before $1994,$ many transactions were conducted in dollars rather than in reals, the domestic currency. Why?

Pragya Ahuja
Pragya Ahuja
Numerade Educator
02:07

Problem 7

Was money a better store of value in the United States in the 1950 s than in the 1970 s? Why or why not? In which period would you have been more willing to hold money?

Pragya Ahuja
Pragya Ahuja
Numerade Educator
03:01

Problem 8

Why have some economists described money during a hyperinflation as a "hot potato" that is quickly passed from one person to another?

Rashmi Sinha
Rashmi Sinha
Numerade Educator
00:55

Problem 9

Why were people in the United States in the nineteenth century sometimes willing to be paid by check rather than with gold, even though they knew there was a possibility that the check might bounce?

Prashant Bana
Prashant Bana
Numerade Educator
02:13

Problem 10

In ancient Greece, why was gold a more likely candidate for use as money than wine was?

Pragya Ahuja
Pragya Ahuja
Numerade Educator
06:25

Problem 11

If you use an online payment system such as PayPal to purchase goods or services on the Internet, does this affect the M1 money supply, M2 money supply, both, or neither? Explain.

Pragya Ahuja
Pragya Ahuja
Numerade Educator
01:45

Problem 12

Rank the following assets from most liquid to least liquid:
a. Checking account deposits
b. Houses
c. Currency
d. Automobile
e. Savings deposits
f. Common stock

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
01:04

Problem 13

Which of the Federal Reserve's measures of the monetary aggregates $-\mathrm{Ml}$ or $\mathrm{M} 2-$ is composed of the most liquid assets? Which is the larger measure?

Pragya Ahuja
Pragya Ahuja
Numerade Educator
01:56

Problem 14

It is not unusual to find a business that displays a sign saying "no personal checks, please." On the basis of this observation, comment on the relative degree of liquidity of a checking account and currency.

Karan Sood
Karan Sood
Numerade Educator
01:31

Problem 15

For each of the following assets, indicate which of the monetary aggregates (M1 and M2) includes them:
a. Currency
b. Money market mutual funds
c. Small-denomination time deposits
d. Checkable deposits

Pragya Ahuja
Pragya Ahuja
Numerade Educator
05:40

Problem 16

Assume that you are interested in earning some return on idle balances you usually keep in your checking account and decide to buy some money market mutual funds shares by writing a check. Comment on the effect of your action (with everything else the same) on $\mathrm{M} 1$ and $\mathrm{M} 2$

Pragya Ahuja
Pragya Ahuja
Numerade Educator
02:43

Problem 17

In September $2008,$ the growth rate of the M1 money supply was zero, while the growth rate of the M2 money supply was about $5 \% .$ In July $2009,$ the growth rate of $\mathrm{M} 1$ was about $17 \%,$ and the growth rate of $\mathrm{M} 2$ was about
$8 \% .$ How should Federal Reserve policymakers interpret these changes in the growth rates of M1 and M2?

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
02:04

Problem 18

Suppose that a researcher discovers that a measure of the total amount of debt in the U.S. economy over the past twenty years was a better predictor of inflation and the business cycle than $\mathrm{M} 1$ or $\mathrm{M} 2$. Does this discovery mean that we should define money as equal to the total amount of debt in the economy?

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
00:56

Problem 19

The table below shows hypothetical values, in billions of dollars.
a. Use the table to calculate the M1 and M2 money supply for each year, as well as the growth rates of the M1 and M2 money supply from the previous year
b. Why are the growth rates of $\mathrm{M} 1$ and $\mathrm{M} 2$ so different? Explain.
$$\begin{array}{llccc}
& & \mathbf{2 0 0 9} & \mathbf{2 0 1 0} & \mathbf{2 0 1 1} & \mathbf{2 0 1 2} \\
\hline \text { A. } & \text { Currency } & 900 & 920 & 925 & 931 \\
\text { B. } & \text { Money market mutual fund shares } & 680 & 681 & 679 & 688 \\
\text { C. } & \text { Saving account deposits } & 5,500 & 5,780 & 5,968 & 6,105 \\
\text { D. } & \text { Money market deposit accounts } & 1,214 & 1,245 & 1,274 & 1,329 \\
\text { E. } & \text { Demand and checkable deposits } & 1,000 & 972 & 980 & 993 \\
\text { F. } & \text { Small denomination time deposits } & 830 & 861 & 1,123 & 1,566 \\
\text { G. } & \text { Traveler's checks } & 4 & 4 & 3 & 2 \\
\text { H. } & \text { 3-month treasury bills } & 1,986 & 2,374 & 2,436 & 2,502
\end{array}$$

Maxime Rossetti
Maxime Rossetti
Numerade Educator