1. Which of the Following Are True Statements?

Problem Set 1 Econ 333 (01) Summer 2002 (Dr. Tin-Chun Lin)

1. Which of the following are true statements? (A) The conversion of a barter economy to one that uses money increases efficiency by reducing the cost of exchange. (B) The conversion of a barter economy to one that uses money increases efficiency by reducing the cost to those who wish to specialize. (C) The conversion of a barter economy to one that uses money increases efficiency by reducing transactions costs. (D) All of the above are true. (E) Only (A) and (C) of the above are true. (Answer: (D))

2. When compared to exchange systems that rely on money, disadvantages of the barter system include: (A) The requirement of a double coincidence of wants. (B) Increasing the cost of exchanging goods over time. (C) Raising the cost of exchange to those who would specialize. (D) All of the above. (E) None of the above. (Answer: (D))

3. Because it is a medium of exchange, money (A) Discourages specialization and the division of labor. (B) Reduces transaction costs. (C) Is not allowed to earn interest. (D) Only (A) and (C) of the above. (E) None of the above. (Answer: (B))

4. Which of the following statements accurately describes the three different measures of the money supply—M1, M2, and M3? (A) The three measures do not move together, so they cannot be used interchangeably by policymakers. (B) The three measures’ movements closely parallel each other, even on a month-to- month basis. (C) Short-run movements in the money supply are extremely reliable. (D) Both (A) and (C) of the above. (E) None of the above. (Answer: (A))

5. When an interest rate of 5 percent, the present value of $100 next year is: (A) $100. (B) $105. (C) $95. (D) $90. (E) $110. (Answer: (C))

6. If a $10,000 coupon bond has a coupon rate of 4 percent, than the coupon payment every year is (A) $40 (B) $140 (C) $440 (D) $640 (E) $400 (Answer: (E))

7. Rank the following assets from most liquid to lest liquid: a. Checking account deposits b. Houses c. Currency d. Washing machines e. Saving deposits f. Common stock (Answer: The ranking is a and c the most liquid; then, in decreasing order of liquidity, e, f, b, and d)

8. In Brazil, a country that was undergoing a rapid inflation, many transactions were conducted in dollars rather than in real, the domestic currency. Why? (Answer: Because of rapid inflation, the domestic currency, the real, is a poor store of value. Thus many people would rather hold dollars, which are a better store of value, and use them in their daily shopping.)

9. You have just won $20 million in the state lottery, which promises to pay you $1 million (tax free) every year for the next 20 years. Have you really won $20 million? (Answer: No, because the present discounted value of these payments is necessarily less than $20 million as long as the interest rate is greater than zero)

10. If a $5000 coupon bond has a coupon rate of 13 percent, then the coupon payment every year is (A) $650 (B) $1300 (C) $130 (D) $13 (E) None of the above. (Answer: (A))