1. A barter economy is more efficient than a money economy because it involves the direct exchange of goods and services.
false
Correct Answer: False
Explanation: A barter economy is highly inefficient primarily because it requires a 'double coincidence of wants'. This means each party to a transaction must have something the other wants, leading to high search costs. Money eliminates this problem by acting as a universally accepted medium of exchange, thereby promoting economic efficiency.
Source: EC3115 - Monetary Economics Unit D Lectures.pdf, Slide 5; Lewis, M.K. and Mizen, P.D. (2000), Monetary Economics, Chapter 1.
2. The 'unit of account' function of money increases the number of prices needed in an economy compared to barter.
false
Correct Answer: False
Explanation: The 'unit of account' function of money drastically reduces the number of prices. In a barter economy with \(N\) goods, you need \(N(N-1)/2\) prices. In a monetary economy, you only need \(N\) prices expressed in the monetary unit. This simplifies trade and economic calculation.
Source: Lewis, M.K. and Mizen, P.D. (2000), Monetary Economics, Chapter 1; EC3115 - Monetary Economics Unit D Lectures.pdf, Slide 10.
3. Credit money is also known as 'outside money' because it is created outside the private banking system.
false
Correct Answer: False
Explanation: This is false. Credit money, such as bank deposits, is known as 'inside money' because it is created within the private sector and represents a liability of the creator (the bank) that is matched by an asset (a loan). 'Outside money' is money that is not a liability of anyone in the private sector, such as fiat currency issued by a central bank.
Source: EC3115 - Ch 2 Nature of money-1.pdf, Section 2.10.
4. The Wicksell problem highlights the breakdown of trade due to a lack of trust, even when a double coincidence of wants is not an issue.
true
Correct Answer: True
Explanation: True. The Wicksell problem illustrates a situation, typically in a multi-person economy, where a chain of trades is required. Trade can break down not because of a lack of matching wants, but because of a lack of trust that intermediaries in the chain will fulfill their obligations. This lack of trust prevents the initial transaction from occurring.
Source: EC3115 - Ch 2 Nature of money-1.pdf, Section 2.9; Kiyotaki, N. and Moore, J.H. (2001), 'Evil is the Root of all Money'.
5. A transaction using a bank debit card is considered a final payment at the moment of use, whereas a credit card transaction is not.
true
Correct Answer: True
Explanation: A debit card transaction involves the transfer of credit money (a bank's IOU) from the payer's account to the payee's account. This is considered a final payment. A credit card transaction, however, merely replaces the payer's debt to the merchant with a new, and often larger, debt to the credit card company. The final payment occurs later when the credit card bill is paid.
Source: EC3115 - Ch 2 Nature of money-1.pdf, Section 2.8.
6. Commodity money, such as gold, has no intrinsic value.
false
Correct Answer: False
Explanation: Commodity money is distinguished by having intrinsic value; it has value independent of its use as money. For example, gold can be used for jewelry or in industrial processes. Fiat money, by contrast, has no intrinsic value.
Source: EC3115 - Ch 2 Nature of money-1.pdf, Section 2.10.
7. Indirect barter can lead to the emergence of a commodity money.
true
Correct Answer: True
Explanation: True. In a situation like the Wicksell problem, a trader might accept a commodity they do not wish to consume, not for its use-value, but because they know it is widely desired and can be easily traded in the future for a good they do want. This process of indirect barter, where a good is accepted for its exchange-value, is how a commodity can spontaneously emerge as a medium of exchange (commodity money).
Source: EC3115 - Ch 2 Nature of money-1.pdf, Section 2.9.
8. An asset's liquidity is solely determined by how quickly it can be converted into cash.
false
Correct Answer: False
Explanation: Liquidity is a broader concept. While speed of conversion is a key component, it also involves the absence of a significant loss of value upon conversion. An asset is highly liquid if it can be converted into a means of payment both speedily and without loss of value.
Source: EC3115 - Monetary Economics Unit D Lectures.pdf, Slide 3.
9. Fiat money's value is derived from the 'full-bodied' precious metal content it contains.
false
Correct Answer: False
Explanation: Fiat money, by definition, is not backed by or convertible into a physical commodity. Its value comes from government decree ('fiat') and social convention—the trust and belief among people that it will be accepted as payment by others.
Source: Lewis, M.K. and Mizen, P.D. (2000), Monetary Economics, Chapter 2.
10. In a barter economy with 1,000 different goods, there are 499,500 distinct relative prices.
true
Correct Answer: True
Explanation: True. The number of relative prices in a barter economy is given by the formula \(T = n(n-1)/2\), where \(n\) is the number of goods. For \(n=1,000\), the number of prices is \(1000 * 999 / 2 = 499,500\). This illustrates the immense computational burden that the 'unit of account' function of money helps to solve.
Source: EC3115 - Monetary Economics Unit D Lectures.pdf, Slide 10.
11. The 'store of value' function of money is unique to money; no other assets can perform this function.
false
Correct Answer: False
Explanation: Many assets serve as a store of value, including stocks, bonds, and real estate. The distinguishing feature of money is not that it is a store of value, but that it is the most liquid of all assets, allowing it to also function as a medium of exchange.
Source: EC3115 - Monetary Economics Unit D Lectures.pdf, Slide 11.
12. In the Kiyotaki and Moore (2001) model, 'evil is the root of all money' refers to the idea that money arises to overcome a lack of trust and commitment in transactions.
true
Correct Answer: True
Explanation: True. The phrase suggests that if everyone could be trusted to fulfill their promises, there would be no need for a medium of exchange. Money emerges as a solution to the problem of enforcement and commitment, particularly the inability to prevent individuals from defaulting on their debts (the 'evil' of self-interest).
Source: Kiyotaki, N. and Moore, J.H. (2001), 'Evil is the Root of all Money'.
13. A key disadvantage of commodity money is that its supply is often unstable and determined by factors unrelated to the needs of the economy.
true
Correct Answer: True
Explanation: True. For example, a gold rush could dramatically increase the money supply, leading to inflation, while a poor harvest of a crop used as money could cause deflation. The supply of commodity money is often inelastic and not easily managed by a central authority to suit economic conditions.
Source: Lewis, M.K. and Mizen, P.D. (2000), Monetary Economics, Chapter 2.
14. When you use a debit card, you are directly spending fiat money.
false
Correct Answer: False
Explanation: When you use a debit card, you are transferring credit money (a bank deposit, which is a liability of your bank) to the merchant's bank. You are not directly spending fiat money (like physical cash), but rather an IOU from your bank.
Source: EC3115 - Ch 2 Nature of money-1.pdf, Section 2.8.
15. The concept of 'Gresham's Law' (bad money drives out good) applies only to fiat money systems.
false
Correct Answer: False
Explanation: Gresham's Law is most famously associated with commodity money systems where 'good' money (e.g., full-weight coins) and 'bad' money (e.g., debased or clipped coins) are forced to circulate at the same face value. People will hoard the good money and spend the bad money, causing the good money to disappear from circulation.
Source: Goodhart, C.A.E. (1998), 'The two concepts of money'.
16. A key characteristic of a good medium of exchange is that it must be easily divisible.
true
Correct Answer: True
Explanation: True. To facilitate transactions of various sizes, money must be divisible into smaller units without losing its value. For example, a cow would be a poor medium of exchange because it is not easily divisible.
Source: EC3115 - Monetary Economics Unit D Lectures.pdf, Slide 13.
17. The 'double coincidence of wants' problem is solved by the 'store of value' function of money.
false
Correct Answer: False
Explanation: The double coincidence of wants is solved by the 'medium of exchange' function of money. This function allows individuals to accept a common token (money) in exchange for goods and services, which they can then use to trade with others, eliminating the need for a direct match of wants.
Source: EC3115 - Monetary Economics Unit D Lectures.pdf, Slide 8.
18. All money is debt.
false
Correct Answer: False
Explanation: This is a nuanced topic, but generally false in the context of outside money. Inside money (like bank deposits) is clearly debt (a liability of the bank). However, outside money (like fiat currency) is not a liability of anyone in the private sector. While it can be viewed as a non-interest-bearing perpetual liability of the government, it functions differently from conventional debt.
Source: Goodhart, C.A.E. (1998), 'The two concepts of money'.
19. High and unpredictable inflation enhances money's usefulness as a unit of account.
false
Correct Answer: False
Explanation: High and unpredictable inflation severely undermines all functions of money, especially its role as a unit of account and a store of value. When the value of the monetary unit is unstable, it becomes a poor yardstick for measuring value and can lead to 'menu costs' and confusion.
Source: Lewis, M.K. and Mizen, P.D. (2000), Monetary Economics, Chapter 1.
20. The emergence of money is purely a result of government intervention.
false
Correct Answer: False
Explanation: This is a central debate. While governments play a key role in defining legal tender (fiat money), many theories suggest that money (especially commodity money) can emerge spontaneously from the market process as an optimal solution to the inefficiencies of barter, without any government action.
Source: EC3115 - Ch 2 Nature of money-1.pdf, Section 2.9.
21. The primary function of money that distinguishes it from other assets is its role as a unit of account.
false
Correct Answer: False
Explanation: The primary function that distinguishes money from other assets (like stocks or bonds, which are stores of value) is its role as a medium of exchange. While the unit of account and store of value functions are crucial, it is the universal acceptance in exchange for goods and services that is money's unique feature.
Source: EC3115 - Monetary Economics Unit D Lectures.pdf, Slide 7.
22. 'Inside money' represents a net asset for the private sector as a whole.
false
Correct Answer: False
Explanation: Inside money (e.g., commercial bank deposits) is a liability for the bank that issues it and an asset for the person who holds it. Therefore, for the private sector as a whole, inside money nets out to zero. It is a claim of one private agent on another.
Source: EC3115 - Ch 2 Nature of money-1.pdf, Section 2.10.
23. The use of money as a 'standard for deferred payment' is derived from its function as a store of value.
true
Correct Answer: True
Explanation: True. For money to be used to denominate future payments (contracts, loans), it must be expected to retain its value over time. Therefore, its function as a standard for deferred payment is closely linked to and dependent on its function as a store of value.
Source: Lewis, M.K. and Mizen, P.D. (2000), Monetary Economics, Chapter 1.
24. In a modern economy, the majority of the money supply consists of fiat money (cash and coins).
false
Correct Answer: False
Explanation: In most modern economies, the vast majority of the broad money supply consists of credit money, specifically commercial bank deposits. Fiat money (currency in circulation) typically makes up only a small fraction of the total money supply.
Source: Lewis, M.K. and Mizen, P.D. (2000), Monetary Economics, Chapter 2.
25. The value of fiat money is ultimately based on the trust that users have in the issuing authority.
true
Correct Answer: True
Explanation: True. Since fiat money is not backed by a physical commodity, its value rests on the credibility of the issuing authority (usually a central bank or government) to keep its value stable and on the social convention that it will continue to be accepted by others in exchange for goods and services.
Source: EC3115 - Ch 2 Nature of money-1.pdf, Section 2.10.
26. A debit card and a credit card are identical in terms of the type of money used in the transaction.
false
Correct Answer: False
Explanation: They are fundamentally different. A debit card transaction uses credit money (a bank deposit) to settle the payment. A credit card transaction does not involve money at all at the point of sale; it is a form of borrowing where the credit card company pays the merchant and the cardholder incurs a debt to the company.
Source: EC3115 - Ch 2 Nature of money-1.pdf, Section 2.8.
27. The problem of the indivisibility of certain goods is a major source of inefficiency in a barter system.
true
Correct Answer: True
Explanation: True. If a person wants to trade a large, indivisible good (like a boat) for a small good (like a loaf of bread), it is impossible to make change. This makes many potential welfare-enhancing trades impossible, highlighting a key failure of barter that money solves through its property of divisibility.
Source: EC3115 - Monetary Economics Unit D Lectures.pdf, Slide 6.
28. According to Goodhart, the two concepts of money are 'money as a medium of exchange' and 'money as a store of value'.
false
Correct Answer: False
Explanation: Goodhart's two concepts of money distinguish between the 'Metallist' view (money as a commodity, emerging from the market to reduce transaction costs) and the 'Chartalist' or state theory view (money as a creature of the state, a token whose value is derived from the state's willingness to accept it for tax payments).
Source: Goodhart, C.A.E. (1998), 'The two concepts of money'.
29. An asset's liquidity is inversely related to the transaction costs of converting it into a medium of exchange.
true
Correct Answer: True
Explanation: True. High liquidity means an asset can be converted into a means of payment quickly and with minimal loss of value. High transaction costs (including time, fees, and potential for capital loss) are the opposite of this, hence liquidity and transaction costs are inversely related.
Source: EC3115 - Monetary Economics Unit D Lectures.pdf, Slide 3.
30. The Wicksell problem demonstrates that even with a medium of exchange, trade can fail due to asymmetric information.
false
Correct Answer: False
Explanation: The core of the Wicksell problem is not asymmetric information, but a lack of trust or commitment in a sequential chain of exchange. It highlights how a lack of enforcement can cause trade to break down, which then leads to the emergence of a commodity money as a solution.
Source: EC3115 - Ch 2 Nature of money-1.pdf, Section 2.9.
31. Fiat money is an example of 'outside money'.
true
Correct Answer: True
Explanation: True. 'Outside money' is money that is not a liability of any private sector agent. Fiat currency, issued by the central bank, is a liability of the government but is considered an asset for the private sector as a whole, fitting the definition of outside money.
Source: EC3115 - Ch 2 Nature of money-1.pdf, Section 2.10.
32. The introduction of a unit of account in an economy of N goods reduces the number of prices from N to N-1.
false
Correct Answer: False
Explanation: The reduction is far more dramatic. A unit of account reduces the number of prices from N(N-1)/2 in a barter system to just N prices (one for each good, expressed in the unit of account).
Source: EC3115 - Monetary Economics Unit D Lectures.pdf, Slide 10.
33. A key advantage of fiat money over commodity money is that its supply can be managed by a central authority to achieve macroeconomic objectives.
true
Correct Answer: True
Explanation: True. This is a primary reason for the shift to fiat money systems. The supply of fiat money is elastic and can be controlled by a central bank through monetary policy to influence inflation, employment, and economic growth, which is not possible with a commodity standard like gold.
Source: Lewis, M.K. and Mizen, P.D. (2000), Monetary Economics, Chapter 2.
34. When a commercial bank makes a loan, it creates a new asset (the loan) and a new liability (a deposit) of the same amount.
true
Correct Answer: True
Explanation: True. This is the essence of how commercial banks create credit money ('inside money'). The act of lending simultaneously creates a loan asset for the bank and a deposit liability for the bank (which is an asset for the borrower). This process expands the money supply.
Source: Lewis, M.K. and Mizen, P.D. (2000), Monetary Economics, Chapter 2.
35. The 'portability' of money refers to its ability to hold value over a long period.
false
Correct Answer: False
Explanation: Portability refers to how easily money can be carried around. Durability refers to its ability to withstand wear and tear. The ability to hold value over time is the 'store of value' function.
Source: EC3115 - Monetary Economics Unit D Lectures.pdf, Slide 13.
36. In the absence of a double coincidence of wants, no trade is ever possible in a barter economy.
false
Correct Answer: False
Explanation: While difficult, trade is still possible through indirect barter, where an individual accepts a good they don't want with the intention of trading it later. This process, however, involves high transaction costs and is what can lead to the emergence of a commodity money.
Source: EC3115 - Ch 2 Nature of money-1.pdf, Section 2.9.
37. A credit card transaction is a form of trade credit.
true
Correct Answer: True
Explanation: True. At the point of sale, the user is essentially receiving goods in exchange for a promise to pay later. The credit card company facilitates this by settling with the merchant immediately and extending credit to the cardholder. It is a transfer of IOUs, not a final payment.
Source: EC3115 - Ch 2 Nature of money-1.pdf, Section 2.8.
38. The main risk of fiat money is that its value can be eroded by inflation, potentially leading to hyperinflation.
true
Correct Answer: True
Explanation: True. Because fiat money is not backed by a physical asset and its supply can be easily increased, there is a constant risk that the issuing authority may create too much of it (e.g., to finance government spending), leading to a decline in its purchasing power (inflation).
Source: Lewis, M.K. and Mizen, P.D. (2000), Monetary Economics, Chapter 2.
39. The 'homogeneity' of money means that individual units are interchangeable.
true
Correct Answer: True
Explanation: True. Homogeneity, or fungibility, means that one unit of money (e.g., a £10 note) is perfectly substitutable for any other unit of the same denomination. This is a crucial property for a medium of exchange, as it eliminates the need to assess the quality of each individual unit.
Source: EC3115 - Monetary Economics Unit D Lectures.pdf, Slide 13.
40. The Kiyotaki and Moore model suggests that money arises because people are inherently altruistic.
false
Correct Answer: False
Explanation: The model suggests the exact opposite. The title 'Evil is the Root of all Money' implies that money is necessary precisely because people are self-interested and cannot be trusted to honor their debts without some form of collateral or immediate settlement, which money provides.
Source: Kiyotaki, N. and Moore, J.H. (2001), 'Evil is the Root of all Money'.
41. A bank deposit is a liability to the depositor and an asset to the bank.
false
Correct Answer: False
Explanation: It is the other way around. A bank deposit is an asset for the depositor (it is their money) and a liability for the bank (the bank owes this money to the depositor).
Source: Lewis, M.K. and Mizen, P.D. (2000), Monetary Economics, Chapter 2.
42. The search for a double coincidence of wants leads to high transaction costs in a barter economy.
true
Correct Answer: True
Explanation: True. The time and effort spent looking for a trading partner who has what you want and wants what you have are known as 'search costs'. These costs are a major source of inefficiency in a barter system.
Source: EC3115 - Monetary Economics Unit D Lectures.pdf, Slide 5.
43. Commodity money and credit money are both examples of 'inside money'.
false
Correct Answer: False
Explanation: Credit money (bank deposits) is inside money. However, commodity money (like gold) is a physical asset and is not a liability of any private agent, so it is considered a form of outside money.
Source: EC3115 - Ch 2 Nature of money-1.pdf, Section 2.10.
44. Using a debit card for a purchase is an example of a final payment using credit money.
true
Correct Answer: True
Explanation: True. The transaction involves the transfer of a bank's liability (the deposit) from one account to another. This transfer is considered the final settlement of the debt between the buyer and the seller.
Source: EC3115 - Ch 2 Nature of money-1.pdf, Section 2.8.
45. The 'recognisability' of money is important to prevent counterfeiting.
true
Correct Answer: True
Explanation: True. Money should be easily recognisable as genuine to ensure trust and acceptance. Features that are hard to replicate help prevent counterfeiting and maintain the integrity of the currency.
Source: EC3115 - Monetary Economics Unit D Lectures.pdf, Slide 13.
46. The Chartalist or state theory of money argues that money originated as a spontaneous market invention.
false
Correct Answer: False
Explanation: This describes the opposing Metallist view. The Chartalist theory argues that money is a 'creature of the state'. Its value originates from the state's power to declare what it will accept as payment for taxes and other obligations.
Source: Goodhart, C.A.E. (1998), 'The two concepts of money'.
47. Inflation enhances the store of value function of money.
false
Correct Answer: False
Explanation: Inflation, which is a decrease in the purchasing power of money, undermines its function as a store of value. If money is worth less tomorrow than it is today, it is a poor vehicle for storing wealth.
Source: Lewis, M.K. and Mizen, P.D. (2000), Monetary Economics, Chapter 1.
48. A credit card balance is an asset for the cardholder.
false
Correct Answer: False
Explanation: A credit card balance is a liability for the cardholder. It represents a debt that the cardholder owes to the credit card company.
Source: EC3115 - Ch 2 Nature of money-1.pdf, Section 2.8.
49. The use of a single unit of account simplifies relative prices and economic calculation.
true
Correct Answer: True
Explanation: True. By providing a common measure of value, a unit of account makes it much easier to compare the costs of different goods and services, facilitating rational decision-making and reducing calculation costs compared to a barter system.
Source: EC3115 - Monetary Economics Unit D Lectures.pdf, Slide 10.
50. The physical properties of a commodity are irrelevant to its potential to become money.
false
Correct Answer: False
Explanation: The physical properties are highly relevant. Good commodity money is typically durable, divisible, portable, homogeneous, and recognisable. Commodities that lack these properties (e.g., are perishable or hard to transport) are poor candidates for money.
Source: EC3115 - Monetary Economics Unit D Lectures.pdf, Slide 13.
51. Paying off a credit card bill constitutes a final payment.
true
Correct Answer: True
Explanation: True. The initial credit card transaction is just the creation of a debt. The final payment occurs when the cardholder settles this debt with the credit card company, typically by transferring credit money (from a bank deposit) to the company.
Source: EC3115 - Ch 2 Nature of money-1.pdf, Section 2.8.
52. All stores of value are also mediums of exchange.
false
Correct Answer: False
Explanation: Many things can be a store of value (e.g., houses, art, bonds), but they are not generally accepted as a medium of exchange due to a lack of liquidity. Money is unique in that it serves both functions well.
Source: EC3115 - Monetary Economics Unit D Lectures.pdf, Slide 11.
53. The Metallist view of money emphasizes the role of the state in creating money.
false
Correct Answer: False
Explanation: This is false. The Metallist view argues that money emerges spontaneously from the market as a commodity chosen to minimize transaction costs. The Chartalist (state) theory emphasizes the role of the state.
Source: Goodhart, C.A.E. (1998), 'The two concepts of money'.
54. A lack of a common measure of value is a key problem in a barter economy.
true
Correct Answer: True
Explanation: True. Without a unit of account, every good must be priced in terms of every other good, leading to a confusing and unmanageable number of relative prices. This lack of a common measure of value hinders economic calculation and trade.
Source: EC3115 - Monetary Economics Unit D Lectures.pdf, Slide 9.
55. 'Inside money' is created by the central bank.
false
Correct Answer: False
Explanation: Inside money (credit money) is created by commercial banks through the process of lending. Outside money (fiat money) is created by the central bank.
Source: EC3115 - Ch 2 Nature of money-1.pdf, Section 2.10.
56. The primary purpose of money is to increase transaction costs.
false
Correct Answer: False
Explanation: The primary purpose of money is to reduce transaction costs (like search costs and calculation costs) that are inherent in a barter system, thereby making the economy more efficient.
Source: Lewis, M.K. and Mizen, P.D. (2000), Monetary Economics, Chapter 1.
57. A house is a highly liquid asset.
false
Correct Answer: False
Explanation: A house is a highly illiquid asset. While it is a store of value, converting it into a means of payment is a slow, costly, and uncertain process. It cannot be sold quickly without a substantial loss in value.
Source: EC3115 - Monetary Economics Unit D Lectures.pdf, Slide 3.
58. The value of commodity money is determined solely by government fiat.
false
Correct Answer: False
Explanation: The value of commodity money is based on its intrinsic value—the value it has in its non-monetary uses (e.g., gold for jewelry). Government fiat is the basis for the value of fiat money, not commodity money.
Source: EC3115 - Ch 2 Nature of money-1.pdf, Section 2.10.
59. Paying with a debit card and paying with cash are both examples of final payment.
true
Correct Answer: True
Explanation: True. Both transactions settle the debt between the buyer and seller immediately. Paying with cash uses fiat money, while paying with a debit card uses credit money (a bank deposit), but both are considered final payments.
Source: EC3115 - Ch 2 Nature of money-1.pdf, Section 2.8.
60. The Wicksell problem would not exist if all agents in the economy trusted each other perfectly.
true
Correct Answer: True
Explanation: True. The problem arises from a lack of trust that an intermediary in a chain of exchanges will honor their part of the deal. If perfect trust and enforcement existed, credit relations would suffice and the chain of exchanges would complete without the need for a physical medium of exchange.
Source: Kiyotaki, N. and Moore, J.H. (2001), 'Evil is the Root of all Money'.
61. Money's function as a store of value is more important in a high-inflation environment.
false
Correct Answer: False
Explanation: In a high-inflation environment, money rapidly loses its purchasing power, making it a very poor store of value. People will try to hold as little money as possible and instead hold wealth in real assets that are less affected by inflation.
Source: Lewis, M.K. and Mizen, P.D. (2000), Monetary Economics, Chapter 1.
62. The total amount of 'inside money' in an economy can be controlled directly by the central bank.
false
Correct Answer: False
Explanation: The central bank can only indirectly influence the amount of inside money. It does this by setting the policy interest rate and reserve requirements, which affects the willingness of commercial banks to lend and create deposits. The final amount is determined by the behavior of commercial banks and the public.
Source: Lewis, M.K. and Mizen, P.D. (2000), Monetary Economics, Chapter 2.
63. A key difference between a debit card and a credit card is that one is a payment device while the other is a borrowing device.
true
Correct Answer: True
Explanation: True. A debit card is a device to access your own money (a deposit) to make a payment. A credit card is a device to access a pre-approved loan from the credit card issuer to make a purchase, which you must pay back later.
Source: EC3115 - Ch 2 Nature of money-1.pdf, Section 2.8.
64. The efficiency of a monetary economy is independent of the public's confidence in the currency.
false
Correct Answer: False
Explanation: The efficiency of a monetary economy is critically dependent on public confidence. If people lose faith that money will hold its value or be accepted by others, they will be reluctant to accept it, and the economy could revert to inefficient barter. This is particularly true for fiat money.
Source: Lewis, M.K. and Mizen, P.D. (2000), Monetary Economics, Chapter 1.
65. The number of relative prices in a barter economy with 5 goods is 20.
false
Correct Answer: False
Explanation: The formula for the number of prices is N(N-1)/2. For N=5, the number of prices is 5(4)/2 = 10. In a monetary economy, there would be only 5 prices.
Source: EC3115 - Monetary Economics Unit D Lectures.pdf, Slide 10.
66. The concept of liquidity refers only to assets held by commercial banks.
false
Correct Answer: False
Explanation: Liquidity is a general property of all assets, held by any economic agent (individuals, firms, banks). It describes the ease with which an asset can be converted into the economy's medium of exchange without loss of value.
Source: EC3115 - Monetary Economics Unit D Lectures.pdf, Slide 3.
67. The use of commodity money requires trust in an issuing authority.
false
Correct Answer: False
Explanation: Commodity money does not require trust in an issuer, but rather trust in the commodity itself—that it has intrinsic value and will be accepted by others. Trust in an issuing authority is the hallmark of a fiat money system.
Source: Lewis, M.K. and Mizen, P.D. (2000), Monetary Economics, Chapter 2.
68. When you pay for a coffee with a £10 note and receive change, the money has demonstrated the property of divisibility.
true
Correct Answer: True
Explanation: True. The ability to break down a larger unit (£10 note) into smaller units (coins and smaller notes) to pay for an item of lesser value is a clear example of the divisibility property of money, which is essential for facilitating transactions of all sizes.
Source: EC3115 - Monetary Economics Unit D Lectures.pdf, Slide 13.
69. The settlement of a credit card transaction ultimately involves a transfer of outside money.
false
Correct Answer: False
Explanation: The settlement of a credit card bill is typically done by transferring inside money (a bank deposit) from the cardholder's bank account to the credit card company's bank account. Outside money (physical cash) is rarely used for this.
Source: EC3115 - Ch 2 Nature of money-1.pdf, Section 2.8.
70. The three functions of money (medium of exchange, unit of account, store of value) are completely independent of each other.
false
Correct Answer: False
Explanation: The functions are highly interrelated. To be a good medium of exchange, an asset must also be a reasonable store of value (otherwise no one would hold it). To be a good unit of account, its value must be stable, which also makes it a good store of value.
Source: Lewis, M.K. and Mizen, P.D. (2000), Monetary Economics, Chapter 1.
71. The spontaneous emergence of a highly saleable commodity as money is a central idea of the Chartalist theory.
false
Correct Answer: False
Explanation: This is a central idea of the Metallist theory, which posits that money is a market-driven phenomenon. The Chartalist theory, in contrast, asserts that money is a creation of the state.
Source: Goodhart, C.A.E. (1998), 'The two concepts of money'.
72. A key problem with barter is the lack of a standardized way to express the value of goods.
true
Correct Answer: True
Explanation: True. This refers to the absence of a unit of account. Without a common denominator of value, it is difficult to compare the worth of different items, leading to complex and inefficient pricing.
Source: EC3115 - Monetary Economics Unit D Lectures.pdf, Slide 9.
73. Commercial bank money (deposits) is considered 'outside money'.
false
Correct Answer: False
Explanation: Commercial bank deposits are the quintessential example of 'inside money', as they are liabilities of the commercial banks that create them and are matched by assets (loans) also within the private sector.
Source: EC3115 - Ch 2 Nature of money-1.pdf, Section 2.10.
74. When you use a credit card, you are deferring payment by creating a new liability for yourself.
true
Correct Answer: True
Explanation: True. The use of a credit card does not extinguish a debt; it transforms a debt to a merchant into a debt to the credit card company. The payment is deferred until you pay your credit card bill.
Source: EC3115 - Ch 2 Nature of money-1.pdf, Section 2.8.
75. The intrinsic value of fiat money is what makes it a reliable store of value.
false
Correct Answer: False
Explanation: Fiat money has no intrinsic value. Its reliability as a store of value depends entirely on the stability of its purchasing power, which is managed by the central bank and underpinned by public trust.
Source: Lewis, M.K. and Mizen, P.D. (2000), Monetary Economics, Chapter 2.
76. The problem of a 'double coincidence of wants' is the only transaction cost associated with a barter economy.
false
Correct Answer: False
Explanation: While it is the most cited problem, other significant transaction costs in barter include the lack of a common measure of value (calculation costs) and the indivisibility of certain goods.
Source: EC3115 - Monetary Economics Unit D Lectures.pdf, Slides 5-10.
77. Money is the most illiquid asset.
false
Correct Answer: False
Explanation: Money is, by definition, the most liquid asset. Liquidity is the ease with which an asset can be converted into the medium of exchange. Since money is the medium of exchange, it is the benchmark for liquidity.
Source: EC3115 - Monetary Economics Unit D Lectures.pdf, Slide 3.
78. The supply of 'inside money' contracts when commercial banks make fewer loans.
true
Correct Answer: True
Explanation: True. Since inside money is created when banks make loans (creating deposits), a reduction in lending activity (or an increase in loan repayments) will cause the stock of inside money to shrink.
Source: Lewis, M.K. and Mizen, P.D. (2000), Monetary Economics, Chapter 2.
79. A credit card is a form of money.
false
Correct Answer: False
Explanation: A credit card is not money. It is a tool for deferring payment and taking out a loan. The actual money (typically credit money/bank deposits) is transferred later when the credit card bill is paid.
Source: EC3115 - Ch 2 Nature of money-1.pdf, Section 2.8.
80. The primary function of a unit of account is to act as a medium of exchange.
false
Correct Answer: False
Explanation: These are two distinct functions of money. The unit of account is a measure of value (a yardstick), while the medium of exchange is the object used to make payments. While the same object (e.g., the pound sterling) performs both functions, the functions themselves are different.
Source: Lewis, M.K. and Mizen, P.D. (2000), Monetary Economics, Chapter 1.
81. The existence of money makes an economy less specialized.
false
Correct Answer: False
Explanation: The existence of money allows for greater specialization. By reducing transaction costs, money enables individuals to specialize in what they produce best and then trade for all other goods and services they need, leading to a more productive economy.
Source: EC3115 - Monetary Economics Unit D Lectures.pdf, Slide 4.
82. 'Outside money' consists of liabilities of the private sector.
false
Correct Answer: False
Explanation: 'Outside money' is defined as money that is not a liability of the private sector. It is an asset to the private sector that is a liability of the public sector (the central bank/government). 'Inside money' consists of liabilities of the private sector.
Source: EC3115 - Ch 2 Nature of money-1.pdf, Section 2.10.
83. A debit card transaction results in a new liability for the cardholder.
false
Correct Answer: False
Explanation: A debit card transaction reduces an existing asset of the cardholder (their bank deposit). It does not create a new liability. A credit card transaction creates a new liability.
Source: EC3115 - Ch 2 Nature of money-1.pdf, Section 2.8.
84. The value of commodity money is independent of its supply and demand.
false
Correct Answer: False
Explanation: Like any commodity, the value of commodity money is determined by the supply of and demand for that commodity, both for its monetary and non-monetary uses. For example, a new discovery of gold (increased supply) would cause its value to fall.
Source: Lewis, M.K. and Mizen, P.D. (2000), Monetary Economics, Chapter 2.
85. The main advantage of barter is that it protects against inflation.
false
Correct Answer: False
Explanation: While barter does not suffer from monetary inflation, its overwhelming disadvantages (high transaction costs, lack of a unit of account, etc.) make it far less efficient than a monetary economy. The costs of barter far outweigh any perceived benefit related to inflation.
Source: EC3115 - Monetary Economics Unit D Lectures.pdf, Slide 5.
86. Money's role as a standard of deferred payment is crucial for the existence of credit markets.
true
Correct Answer: True
Explanation: True. Credit markets depend on the ability to write contracts for future payment (loans). Money, in its role as a standard of deferred payment, provides the unit in which these future obligations are denominated.
Source: Lewis, M.K. and Mizen, P.D. (2000), Monetary Economics, Chapter 1.
87. The creation of 'inside money' by banks is constrained by reserve requirements and capital adequacy ratios.
true
Correct Answer: True
Explanation: True. While banks create money by lending, they are not unconstrained. They must hold a certain amount of liquid reserves to meet withdrawals and are required by regulators to maintain a certain level of capital relative to their risk-weighted assets. These factors limit their ability to create money.
Source: Lewis, M.K. and Mizen, P.D. (2000), Monetary Economics, Chapter 2.
88. A credit card company is a type of bank.
false
Correct Answer: False
Explanation: While they are both financial intermediaries, a credit card company is not a bank. A key difference is that banks take deposits from the public, whereas credit card companies primarily offer loans and do not hold customer deposits in the same way.
Source: EC3115 - Ch 2 Nature of money-1.pdf, Section 2.8.
89. The 'double coincidence of wants' refers to a situation where two people want the same good.
false
Correct Answer: False
Explanation: This is a common misunderstanding. It refers to a situation where two people each have a good that the other wants. For a trade to occur, you must find someone who has what you want, and that person must also want what you have.
Source: EC3115 - Monetary Economics Unit D Lectures.pdf, Slide 5.
90. The shift from commodity money to fiat money has generally been associated with a decrease in the role of central banks.
false
Correct Answer: False
Explanation: The shift to fiat money has massively increased the role and importance of central banks, as they are now responsible for managing the money supply and maintaining the value and credibility of the currency, a role that was previously anchored by the commodity itself.
Source: Lewis, M.K. and Mizen, P.D. (2000), Monetary Economics, Chapter 2.
91. All financial assets are money.
false
Correct Answer: False
Explanation: Money is a specific type of financial asset. While all money is a financial asset, not all financial assets (e.g., stocks, bonds, derivatives) are money, because they are not generally accepted as a medium of exchange.
Source: EC3115 - Monetary Economics Unit D Lectures.pdf, Slide 3.
92. The use of credit cards increases the amount of 'inside money' in the economy.
false
Correct Answer: False
Explanation: The use of credit cards does not, in itself, create inside money. It creates a loan. Inside money (deposits) is created by commercial banks when they make loans, not by the use of a credit card for a purchase.
Source: EC3115 - Ch 2 Nature of money-1.pdf, Section 2.8.
93. The 'store of value' function is the most important one for an economy experiencing hyperinflation.
false
Correct Answer: False
Explanation: During hyperinflation, money fails catastrophically as a store of value. People will abandon the local currency in favor of more stable foreign currencies or real assets. The medium of exchange function, while also impaired, remains the last function to disappear.
Source: Lewis, M.K. and Mizen, P.D. (2000), Monetary Economics, Chapter 1.
94. The total value of 'inside money' must always be equal to the total value of 'outside money'.
false
Correct Answer: False
Explanation: There is no reason for these two amounts to be equal. In most modern economies, the stock of inside money (bank deposits) is many times larger than the stock of outside money (physical currency).
Source: Lewis, M.K. and Mizen, P.D. (2000), Monetary Economics, Chapter 2.
95. Barter is a system of trade based on credit.
false
Correct Answer: False
Explanation: Barter is the direct exchange of goods and services for other goods and services without the use of money or credit. A credit system is based on promises of future payment, which is what money helps to facilitate.
Source: EC3115 - Monetary Economics Unit D Lectures.pdf, Slide 5.
96. When you withdraw cash from an ATM, you are converting 'inside money' into 'outside money'.
true
Correct Answer: True
Explanation: True. You are converting your bank deposit (a liability of your bank, i.e., inside money) into physical currency (a liability of the central bank, i.e., outside money).
Source: EC3115 - Ch 2 Nature of money-1.pdf, Section 2.10.
97. The use of a common unit of account increases the information costs of trade.
false
Correct Answer: False
Explanation: It drastically reduces information costs. Instead of needing to know thousands of relative prices, agents only need to know the N prices of goods in terms of the single unit of account, which simplifies decision-making.
Source: EC3115 - Monetary Economics Unit D Lectures.pdf, Slide 10.
98. A credit card allows you to spend money you do not have.
true
Correct Answer: True
Explanation: True. This is the essence of a credit card. It is a tool for obtaining a loan at the point of sale, allowing you to make purchases now with the promise to pay the money back in the future.
Source: EC3115 - Ch 2 Nature of money-1.pdf, Section 2.8.
99. The supply of fiat money is determined by the profitability of mining it.
false
Correct Answer: False
Explanation: This describes a commodity money like gold. The supply of fiat money is determined by the policy decisions of the central bank; it is not tied to a physical production process.
Source: Lewis, M.K. and Mizen, P.D. (2000), Monetary Economics, Chapter 2.
100. Money eliminates all transaction costs.
false
Correct Answer: False
Explanation: Money drastically reduces transaction costs compared to barter, but it does not eliminate them entirely. There are still costs associated with using money, such as the time it takes to conduct transactions, banking fees, and the 'shoe-leather costs' of managing cash.
Source: Lewis, M.K. and Mizen, P.D. (2000), Monetary Economics, Chapter 1.