ANSWER OUTLINE
ECONOMICS 353 (SECTION 1) L. Tesfatsion/Spring 01
EXERCISE SET 3: 5 POINTS TOTAL DUE: Tuesday, Feb 6, 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 a RED bubble (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 bubble sheet to the following five multiple choice questions:
1-1 In markets for loans, adverse selection refers to
A. the tendency of borrowers to select risky loans.
B B. 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.
C. the high interest rates charged to risky loan applicants.
D. the incentive of borrowers to shift to more risky loan projects after
their loan contracts are signed.
2-1 Whatever a society uses as money, the defining characteristic is that
A. it must be completely inflation proof.
B B. it must be generally acceptable as payment for goods and services
and repayment of debts.
C. it must contain at least some amount of a precious metal.
D. it must be produced by government.
E. both B and D
3-1 The conversion of a barter economy to one that uses money
A. increases efficiency by reducing the volume of trade.
B. increases efficiency by reducing the need to specialize.
C C. increases efficiency by reducing transactions costs.
D. does not increase economic efficiency.
E. All except D
4-1 For an economy with exactly 11 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. 22; 11
B B. 55; 11
C. 55; 22
D.110; 22
E.110; 11
5-1 Which of the following statements about "fiat money" are accurate:
A. fiat money is unbacked, i.e., it is not collateralized by any commodity.
B. fiat money is paper money.
C. fiat money is legal tender -- i.e., by law, citizens must accept
it as repayment for debts.
D D. all of the above are true by definition of fiat money.
E. only A and B
