1. No, the funds would not generally be allocated
to most valued uses; financial markets and insti-
tutions work better.
3. The financial system provides three key services
to savers and borrowers: risk sharing (people
can share and transfer risk), liquidity (people
can exchange their assets for other assets at low
cost), and information (financial markets com-
municate information, and financial institutions
specialize in gathering and using information
about borrowers, so they lend more efficiently).
5. Monetary theory focuses on the relationships
linking changes in the money supply to changes
in aggregate output and prices. The Fed should
understand how its actions affect the economy.
For everyday financial and economic decisions,
we need to know what effects money has on the
7. The local bank provides risk-sharing, liquidity,
and information services.
9. In a global economy, their exports to the United
States would decline, possibly leading to an eco-
1. To serve as money, they must generally be
accepted as means of payment. Your acceptance
of dollar bills and checks as money is based on
your belief that others will accept them.
3. In a barter system, there are too many prices,
and nonstandard goods complicate pricing.
Trade requires a double coincidence of wants.
5. Commodity money has real uses (e.g., gold, sil-
ver); fiat money has no intrinsic value.
7. A payments system is a mechanism for conduct-
ing transactions. If the payments system became
less efficient, the costs to the economy would be
fewer and more costly transactions, that is, los-
ing gains from specialization.
9. No. Houses, bonds, and stocks are also stores of
value. There is an advantage to money’s being a
store of value, because after trading for it, a per-
son can hold it; otherwise, something else that is
also a store of value is likely to become money.
11. The definitions of the money supply range from
, to the broader,
. The definitions
of the money supply can be used for different
purposes and have varied over time in their use-
fulness for predicting future movements in
prices and output.
13. Whether caused by inflation or deflation,
changes in the purchasing power of money
affect money’s usefulness as a store of value and
as a standard of deferred payment.
15. The reason is convenience; transactions costs of
running to the bank all the time are avoided.
17. Not necessarily; if prices rose more than 10%,
your real income has fallen.
19. In Friedmania, bad money drives out the good;
people will spend the new crowns and hoard the
21. Liquidity indicates the ease with which an asset
can be converted to definitive money. Ranking
from most to least liquid: dollar bill, checking
account, money-market mutual fund, passbook
savings account, corporate stock, gold, house.