Chapter 3: Q.1 (page 110)
Why is simply counting currency an inadequate measure of money?
Counting currency is inadequate measure because, it does not cover entire money supply of the economy.
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Why were people in the United States in the nineteenth century sometimes willing to be paid by check rather than with gold, even though they knew there was a possibility that the check might bounce?
Explain the concept of liquidity. Rank the following assets from most liquid to least liquid:
a. Land
b. The inventory of a merchandiser
c. Cash in hand
d. A savings account at a local bank
e. A one-year bond
f. Ordinary shares
In prison, cigarettes are sometimes used among inmates as a form of payment. How is it possible for cigarettes to solve the “double coincidence of wants” problem, even if a prisoner does not smoke?
Suppose that the cost of a movie ticket is \(12, and a latte costs \)6. Why would the theater management say the cost of admission is $12 and not two lattes? Explain why it is more efficient to compare the value of commodities in monetary terms.
Go to the St. Louis Federal Reserve FRED database, and find data on small-denomination time deposits (STDSL), savings deposits and money market deposit accounts (SAVINGSL), and retail money market funds (RMFSL). Calculate the percentage change of each of these three components of M2 (not included in M1) from the most recent month of data available to the same time one year prior. Which component has the highest growth rate? The lowest growth rate? Repeat the calculations using the data from January 2000 to the most recent month of data available, and compare your results. Use your answers from question 1 to determine which grew faster: the non-M1 components of M2, or the M1 money supply.
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