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Chapter 3: Q.1 (page 110)

Why is simply counting currency an inadequate measure of money?

Short Answer

Expert verified

Counting currency is inadequate measure because, it does not cover entire money supply of the economy.

Step by step solution

01

Step 1. Introduction

Money is a tool that serves as a medium in making economic transactions. It facilitates trade, acts a store of unit, and a measure of value.

02

Step 2. Explanation

Money consists of checks, e-cash, deposits, and lots of different styles of fee that surpass the paper and coin form. Therefore, virtually counting foreign money is an insufficient degree as it simply constitutes a small part of money.

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Most popular questions from this chapter

Over several hundred years, payments systems used in countries across the world have evolved. For each of the following situations identify the type of payment utilized and at least one reason why economies are moving from checks to electronic payments.

a. Sheila visits a local grocery store to purchase a dozen eggs and a bag of dog food. She uses a €100 note to pay for the goods.

b. Rachael Garcia, a manager at Proxall Pharmacy, used a piece of gold worth $20 to pay for office supplies she needed this month.

c. Edward has just moved to the city to be closer to his office. He was shopping online for some pieces of furniture and he bought a wardrobe and a table lamp. He used a checking account to initiate an automatic bill payment for the items.

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 Brazil, a country that underwent a rapid inflation before 1994, many transactions were conducted in dollars rather than in reals, the domestic currency. Why?

In ancient Greece, why was gold a more likely candidate for use as money than wine?

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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