CHAPTER 1: WHAT IS MONEY?

To an economist, ________ is anything that is generally accepted in payment for goods or services or in the repayment of debt.

• money

• wealth

• income

• credit

Answer explanation

To an economist, money is defined as anything widely accepted for transactions, including payment for goods, services, or debt repayment. This distinguishes it from wealth, income, and credit, which have different meanings.

Currency includes

• paper money and coins.

• paper money, coins, and checks.

• paper money and checks.

• paper money, coins, checks, and savings deposits.

Answer explanation

Currency primarily includes paper money and coins, which are the physical forms of money used for transactions. Other options like checks and savings deposits are not considered currency in the strictest sense.

The total collection of pieces of property that serve to store value is a person's

• wealth.

• income.

• money.

• credit.

Answer explanation

The total collection of pieces of property that serve to store value is referred to as a person's wealth. Income refers to earnings, money is a medium of exchange, and credit is borrowing capacity, none of which encompass total property value.

________ is a flow of earnings per unit of time.

• Income

• Money

• Wealth

• Currency

Answer explanation

Income refers to the flow of earnings over a specific period, making it the correct choice. Unlike wealth, which is a stock measure, or currency, which is a medium of exchange, income specifically denotes earnings per unit of time.

The difference between money and income is that

• money is a stock and income is a flow.

• money is a flow and income is a stock.

• there is no difference—money and income are both stocks.

• there is no difference—money and income are both flows.

Answer explanation

The correct choice is that money is a stock and income is a flow. Money represents a quantity at a specific time, while income refers to the flow of earnings over a period, highlighting their distinct economic roles.

________ are the time and resources spent trying to exchange goods and services.

• Transaction costs

• Contracting costs

• Barter costs

• Bargaining costs

Answer explanation

Transaction costs refer to the time and resources spent in the process of exchanging goods and services, making it the correct choice. Other options like contracting, barter, and bargaining costs do not encompass the full scope of this definition.

Which of the following statements best explains how the use of money in an economy increases economic efficiency?

• Money increases economic efficiency because it decreases transactions costs.

• Money cannot have an effect on economic efficiency.

• Money increases economic efficiency because it is costless to produce.

• Money increases economic efficiency because it discourages specialization.

Answer explanation

Money increases economic efficiency because it decreases transaction costs, making it easier for buyers and sellers to exchange goods and services, thus facilitating trade and specialization.

All of the following are necessary criteria for a commodity to function as money EXCEPT

• it must deteriorate quickly.

• it must be divisible.

• it must be easy to carry.

• it must be widely accepted.

Answer explanation

For a commodity to function as money, it should not deteriorate quickly. Instead, it must be durable, divisible, easy to carry, and widely accepted. Thus, 'it must deteriorate quickly' is the correct exception.

Bao Chan purchasing football tickets with a $100 bill is an example of the ________ function of money.

• medium of exchange

• unit of account

• store of value

• specialization

Answer explanation

Bao Chan using a $100 bill to buy football tickets illustrates the 'medium of exchange' function of money, as it facilitates transactions for goods and services.

Apple notices that all of its products (iPhone, MacBook, iMac, Mac Mini,...) are on sale for $1,000. In this case money is functioning as a

• unit of account.

• medium of exchange.

• store of value.

• payments-system ruler.

Answer explanation

In this scenario, money is functioning as a unit of account because it provides a standard measure to price all products at $1,000, allowing for easy comparison and valuation.