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ECON-200 Lecture Notes - Lecture 28: Fiat Money, Baseball Card, Commodity Money

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School
Diablo Valley College
Department
Economics
Course
ECON-200
Professor
Sorce

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Document Summary

Without a monetary system of exchange, people would have to rely on bartering to obtain the things they need. A bartering economy has a hard time allocating resources efficiently. In such an economy, trade requires the double coincidence of wants- or, unlikeliness that two people have the good or service that the other wants. Money: the set of assets in the economy that people regularly use to buy goods and services from each other. Cash would be money, because you can buy dinner with it, but owning a share in a company, which does lead to wealth, is not considered money. Medium of exchange: money is an item that buyers give to sellers when they purchase goods and services. A store of value: an item that people can use to transfer purchasing power from the present to the future; i can get money from work today and use it to buy something in the future.

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Related Questions

Economists use the term “money” to refer to

a. all wealth.

b. all assets, including real assets and financial assets.

c. all financial assets, but not real assets.

d. those types of wealth that are regularly accepted by sellers in exchange for goods and services

1. Which of the following both increase the money supply?

an increase in the discount rate and an increase in the interest rate on reserves
an increase in the discount rate and a decrease in the interest rate on reserves
a decrease in the discount rate and an increase in the interest rate on reserves
a decrease in the discount rate and a decrease in the interest rate on reserves

2. In the U.S., the average adult holds about $3,700 in
currency.
wealth.
M1.
M2.
3. The measure of the money stock called M1 includes
wealth held by people in their checking accounts.
wealth held by people in their savings accounts.
wealth held by people in money market mutual funds.
everything that is included in M2 plus some additional items
4. When the Fed decreases the discount rate, banks will
borrow more from the Fed and lend more to the public. The money supply increases.
borrow more from the Fed and lend less to the public. The money supply decreases.
borrow less from the Fed and lend more to the public. The money supply increases.
borrow less from the Fed and lend less to the public. The money supply decreases.
5. Reserve requirements are regulations concerning
the amount banks are allowed to borrow from the Fed.
the amount of reserves banks must hold against deposits.
reserves banks must hold based on the number and type of loans they make.
the interest rate at which banks can borrow from the Fed.
6. When we say that trade is roundabout we mean that
people sometimes trade goods for goods.
trades require a double coincidence of wants.
currency is accepted primarily to make further trades.
people must spend time searching for the products they wish to purchase.
7. Values of Assets

Asset

Amount in $Billions

Small-time deposits

780

Large time deposits

1,700

Demand deposits

450

Other checkable deposits

370

Savings deposits

4950

Traveller's checks

5

Money market mutual funds

740

Currency

880

Miscellaneous categories of M2

50

Refer to Value of Assets. What is the value of M1 in billions of dollars?
1705
2485
6295
7075
8. In 1991, the Federal Reserve lowered the reserve requirement from 12 per cent to 10 per cent. Other things the same this should have
increased both the money multiplier and the money supply.
decreased both the money multiplier and the money supply.
increased the money multiplier and decreased the money supply.
decreased the money multiplier and increased the money supply.
9. Consider four survivors on an island.

Rupert

has machete

wants fishing spear

Amber

has cooking pot

wants fishing spear

Rob

has fishing spear

wants machete

Tom

has cooking pot

wants machete

Which of the following pairs of survivors has a double-coincidence of wants?
Rupert with Amber, and Rob with Tom
Amber with Tom
Rupert with Rob
None of the above is correct.
10. Economists use the term money to refer to

all wealth.
all assets, including real assets and financial assets.
all financial assets, but not real assets.
those types of wealth that are regularly accepted by sellers in exchange for goods and services.

Choose the correct answer from the brackets:

A)The demand for money is mainly influenced by three variables: r (the short-term interest rate), Y (real GDP), and P (the aggregate Price level). Suppose r rises, but Y and P are unchanged. What happens to the quantity of money demanded?

r is both the opportunity cost of holding money and the reward for holding bonds. Thus, an increase in r causes people to want to hold (more/less ) of their wealth in the form of money and ( more/less) in the form of bonds to take advantage of the higher interest rate.

B)

Suppose real income (Y) rises while the quantity of money in the economy stays the same. What happens to money demand?

The supply of money does not automatically rise when the production of real goods and services (Y) rises. However, the collective demand for money by firms and households does rise. To get this money firms and households attempt to (buy more/ sell some of their /more /less bonds).

Thus, an increase in Y causes people to want to hold (buy more /sell some of their / more /less) of their wealth in the form of money and (buy more / sell some of their / more / less ) in the form of bonds.

C)Suppose the price level (P) rises, but Y and r are unchanged. What happens to money demand?

If Y is unchanged, people will want to buy the same amount of goods and services as before. However, since P is higher, they will need (more / less) money to do so.

Hence, an increase in P causes people to want to hold (more / less) of their wealth in the form of money and (more / less) in the form of bonds.