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16.1  What Is Money, and Why Do We Need It? 1) Your roommate argues that he can think of no better situation than living in a deflationary economy, as prices of goods and services would continuously fall. You disagree and argue that during a deflation, people can be made worse off because A) the purchasing power of people’s incomes would increase. B) the purchasing power of the currency would decrease. C) the value of the real interest rate will drop below the nominal interest rate. D) borrowers will have to pay increasing amounts in real terms over time. 2) In economics, money is defined as A) the total value of one’s assets in current prices. B) the total value of one’s assets minus the total value of one’s debts, in current prices. C) the total amount of salary, interest, and rental income earned during a year. D) any asset people generally accept in exchange for goods and services. 3) Economies where goods and services are traded directly for other goods and services are called ________ economies. A) trade B) barter C) direct D) seigniorage 4) The major shortcoming of a barter economy is A) the requirement of a double coincidence of wants. B) the requirement of specialization and exchange. C) that goods and services are not traded. D) that money loses value from inflation. 5) Commodity money A) has value independent of its use as money. B) has little to no value independent of its use as money. C) is backed by a valuable commodity such as gold. D) can be used to purchase commodities, but not services. 6) Silver is an example of a A) commodity money. B) barter money. C) fiat money. D) representative money. 7) Soldiers in a World War II prisoner-of-war camp A) used gold as a fiat money. B) used cowrie shells as money. C) used cigarettes as money. D) used U.S. dollars as a commodity money. 8) Which of the following is one of the most important benefits of money in an economy? A) Money allows for the exchange of goods and services. B) Money allows for the accumulation of wealth. C) Money makes exchange easier, leading to more specialization and higher productivity. D) Money encourages people to produce all of their own goods (self-sufficiency) and therefore increases economic stability. 9) In an economy with ________, there are more prices than in an economy with ________. A) barter; money B) money; barter C) fiat money; commodity money D) fiat money; barter 10) The statement, “My iPhone is worth $300” represents money’s function as A) a medium of exchange. B) a unit of account. C) a store of value. D) a standard of deferred payment. 1

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