ANSWER OUTLINE
ECONOMICS 353 (SECTION 2) L. Tesfatsion/Spring 01
EXERCISE SET 3: 5 POINTS TOTAL DUE: Tuesday, Feb 6, 2:10 P.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 BROWN bubble (answer) sheet and write "353 SECTION 2-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:
1-2 In markets for loans, moral hazard refers to
A. the tendency of borrowers to undertake risky loans.
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 D. the incentive of borrowers to shift to more risky loan projects after
their loan contracts are signed.
2-2 Checkable deposits in the U.S. satisfy the definition of money because
A. checkable deposits are backed by government guarantees
B. checkable deposits are federally mandated as legal tender
C C. checkable deposits serve as a generally acceptable means of payment
for goods and services and for repayment of debts.
D. all of the above.
E. only B and C
3-2 When compared to exchange systems that rely on money, disadvantages
of the barter payment system include:
A. the requirement of a double coincidence of wants
B. lower costs of exchanging goods over time
C. discouragement of specialization (division of labor)
D D. Only A and C
E. All of the above
4-2 For an economy with exactly 10 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. 20; 10
B B. 45; 10
C. 45; 20
D. 90; 10
E. 90; 20
5-2 The observed tendency for the form of money to evolve from commodity
money to fiat money increases the fragility of money because
A. fiat money can lose much of its value in hyperinflations.
B. fiat money is unbacked, i.e., it is not collateralized by any commodity.
C. fiat money can lose much of its value if people lose confidence in its
general acceptability as a means of payment for goods and services.
D D. all of the above.
E. only A and C
