BR16A: Bridge: Functions of Money
Question 1
Suppose that the cost of a loaf of bread in Zanadoo is 20 shillings, and this represents a full day’s wages for the typical factory worker. The 20 shillings represents a ____ value, whereas the loaf of bread costing a full day’s wage represents a ____ value.
A. real; nominal
B. nominal; real
C. real; real
D. nominal; nominal
Hint
A real value is what you give up in terms of goods or services to purchase something.Answer
B. nominal; real A nominal value is the number of units of currency for which a good or service will exchange. Thus, the number of shillings needed to purchase a loaf of bread is a nominal value. A real value measures rates of exchange in terms of actual goods and services. In this case, in real terms, a loaf of bread will exchange for one day’s labor.Question 2
Which of the following forms of money would best represent fiat money?
A. A $20 bill printed in 2015.
B. Silver quarters made prior to 1965.
C. A rare baseball card given to a landlord in place of rent.
D. An hour-long golf lesson given in exchange for an hour of tutoring in economics.
Hint
Fiat money is money decreed as such by a government.Answer
A. A $20 bill printed in 2015. Fiat money is money that is decreed to be legal tender by a government. It consists predominantly of paper currency, such as a $20 bill, and is not backed by a commodity. Silver quarters made prior to 1965 (when quarters ceased to include silver content), by contrast, derive part of their value from the silver they contain.Question 3
There is much debate about whether the U.S. government should eliminate the penny from circulation and instead round all prices to the nearest 5 cents for everyday cash transactions. Which function of money does a penny not serve well?
A. Medium of exchange
B. Unit of account
C. Store of value
D. The penny does not serve any of the functions of money well.
Hint
As a medium of exchange, money can be used to purchase an item. As a store of value, money can be used to preserve value over time. And as a unit of account, money can be used to represent the value of an item.Answer
A. Medium of exchange The penny is used to represent value today and has the ability to preserve value over time. Thus, the penny serves as a unit of account and a store of value. However, pennies are seldom used to purchase items and so don't function well as a medium of exchange.Question 4
The country of Eggville uses eggs as its official form of currency. All prices in Eggville are shown in terms of eggs, and residents carry around baskets of eggs to buy goods and services. Residents, however, cannot save eggs because they end up spoiling. Which functions of money do eggs serve?
A. unit of account and store of value
B. medium of exchange, unit of account, and store of value
C. medium of exchange and store of value
D. medium of exchange and unit of account
Hint
Money as a medium of exchange can be used to purchase an item. As a store of value, money can be used to preserve value over time. And as a unit of account, money can be used to represent the value of an item.Answer
D. medium of exchange and unit of account In Eggville, eggs function as a medium of exchange, since they can be used to purchase goods and services. Eggs also serve as unit of account, since they are used to represent value; all prices are shown in terms of eggs.Question 5
In which situation is the real value of 1 unit of currency the highest?
A. a Big Mac that costs 7 Swiss Francs in Zurich
B. a Big Mac that costs \$4.75 in New York City
C. a Big Mac that costs 450 yen in Tokyo
D. a Big Mac that costs 4 pounds in London