ANSWER KEY
ECONOMICS 353 (SECTION 1) L. Tesfatsion/Spring 00
EXERCISE SET 3: 5 POINTS TOTAL DUE: Tuesday, February 8, 9:30 A.M.
*IMPORTANT REMINDER: LATE ASSIGNMENTS CANNOT BE ACCEPTED -- NO EXCEPTIONS*
*NOTE:* Please FILL IN YOUR NAME, BIRTH DATE, AND ID (SOC SEC) No. on Side 1
of the accompanying answer sheet and write "353 SECTION 1-EXERCISE SET 3" in
the top margin of Side 1. Use a #2 pencil to MARK YOUR ANSWERS on Side 1
of the answer sheet to the following five multiple choice questions:
1-1. The concept of adverse selection
A. refers to the high rejection rates faced by loan applicants.
B. refers to the tendency of borrowers to undertake risky loans.
C C. refers to the negative effects on the quality of the pool of
loan applicants when banks try to use a single interest rate
to cover expected default costs.
D. refers to the incentive of borrowers to shift to more risky loan
projects after their loan contracts are signed.
2-1. Economists define income as
A. The market value of all assets owned at a point in time.
B. Anything that is generally accepted in payment for goods and
services and for the repayment of debt.
C. Anything that can be used to store value over time.
D D. The flow of value accrued over some specified period of time.
E. None of the above.
3-1. Which of the following are true statements:
A. The change from a barter to a monetary economy increases efficiency
by ensuring a "double coincidence of wants" in goods to be exchanged.
B. The change from a barter to a monetary economy increases efficiency
by reducing costs for those who wish to specialize in production.
C. The change from a barter to a monetary economy increases efficiency
by reducing transactions costs.
D. All of the above are true.
E E. Only B and C are true.
4-1. For an economy with exactly 8 goods, _______ prices are needed to
support exchange under a barter payment system while ______ prices are
needed to support exchange under a monetary payment system.
A. 16; 8
B. 28; 16
C C. 28; 8
D. 64; 16
E. 64; 8
5-1. During periods of rapidly rising prices
A. money fails to serve as a unit of account.
B B. money fails to serve as a good store of value.
C. money fails to serve as a repayment of debt.
D. money fails to serve as a means of payment.
E. money fails to serve as a legal tender.
