《货币银行学》课程授课教案（英文讲义）Chapter 02 Money and the Payments System

Chapter 2 MoneyProblemsand Solutions1.Orderthefollowing commoditiesbythelikelyusefulnessas money,andexplainwhyeach is or is not used as a means of payment.Shellsa.b..Furniturec.Orangesd.WineTreasury billse.Answer:i.Treasury bils: ome n standardized quantities, durable, easyto transport, but notasliquidasmoneyi.Shells: could be standardized, somewhat fragile so not very durable, relatively easyto transport, but not used or valued by most peopleili.Wine: could be standardized, durable, valued by most people, but could be difficulttotransportiv.Furniture: durable and usable, but difficult to transport and to divide into smallerquantities.Oranges: usable, but not durable or easily transportableV.2.Peoplewho buy lottery tickets often refer to their winnings asprize money."In whatsense are they using the word money?Answer:“Money"is being used todescribe people's wealth3. The country of Brieonia has an economy that is based largely on farming andagricultural products.The inhabitants of Brieonia use cheese as their moneyNot surprisingly,the Brieonians complain bitterly about the problems that theira.commodity creates.What are they?b.Modern medical science arrives in Brieonia, and doctors begin giving theBrieonians cholesterol tests.The results lead to the recommendation that theBrieonians reduce the amount of cheese they eat.What is the impact of thisrecommendation on their economy?As the economy of Brieonia becomes industrialized, what changes in thec.monetary system would you expect to see, and why?Answer:a.Cheese is not very durable and therefore would be problematic to transport.b.This wouldreducethevalue of cheeseand causepricesto increase1Instructor's Manual t/a Cecchetti:Money,Banking,andFinancial Markets

Instructor’s Manual t/a Cecchetti: Money, Banking, and Financial Markets 1 Chapter 2 Money Problems and Solutions 1. Order the following commodities by the likely usefulness as money, and explain why each is or is not used as a means of payment. a. Shells b. Furniture c. Oranges d. Wine e. Treasury bills Answer: i. Treasury bills: come in standardized quantities, durable, easy to transport, but not as liquid as money. ii. Shells: could be standardized, somewhat fragile so not very durable, relatively easy to transport, but not used or valued by most people. iii. Wine: could be standardized, durable, valued by most people, but could be difficult to transport. iv. Furniture: durable and usable, but difficult to transport and to divide into smaller quantities. v. Oranges: usable, but not durable or easily transportable. 2. People who buy lottery tickets often refer to their winnings as “prize money.” In what sense are they using the word money? Answer: “Money” is being used to describe people’s wealth. 3. The country of Brieonia has an economy that is based largely on farming and agricultural products. The inhabitants of Brieonia use cheese as their money. a. Not surprisingly, the Brieonians complain bitterly about the problems that their commodity creates. What are they? b. Modern medical science arrives in Brieonia, and doctors begin giving the Brieonians cholesterol tests. The results lead to the recommendation that the Brieonians reduce the amount of cheese they eat. What is the impact of this recommendation on their economy? c. As the economy of Brieonia becomes industrialized, what changes in the monetary system would you expect to see, and why? Answer: a. Cheese is not very durable and therefore would be problematic to transport. b. This would reduce the value of cheese and cause prices to increase

Chapter2 MoneyAs the Brieonian economy grows, the use of money will increase.Brieonians will bemotivatedto find a more convenientformofmoney:Eventuallythe government would probably issue paper currency.4.3When you make a credit card purchase, the merchant allows you to leave with thegoods.Why?Haveyoumadeafinal payment?Answer:No, the merchant allows you to leave because he has been paid by the bank thatissued your credit card, but you still have to pay back the credit card company.5.Describe at least three ways you could pay for your morning cup of coffee.Whatare the advantages and disadvantages of each?Answer:You could use money, a check, a debit card, or a credit cardMoney:This is the most likely to be accepted, but it means you have to replenishyour supply periodically.Check:The least likely to be accepted, and it means you have to walk around withyour checkbook.But the funds remain in your bank account for the time it takes thecheck to make its way through the clearing system.Debit Card:This is very convenient, and likely to be accepted.But it meansimmediate withdrawal of thefunds from your account.(This is probably thecheapest option for the merchant).Credit Card:This allows you to get the cup of coffee and pay later.But you willeventually have to pay.The merchant might not like it, thought, since it isexpensive.6.Explain how money encourages specialization, and how specialization improveseveryone's standard of livingAnswer:Without money,people have to barter to exchange goods and services.Thisrequires a“double coincidence of wants,"which makes it difficult to specialize.In theexample in the text, a plumber is buying groceries; if the grocer doesn't need a plumbingrepair, but does need the outside of his storepainted, theplumber may decideto paint thestore in order to pay for his groceries even though it is not what he does best.Whenmoney is used, people are free to specialize in areas in which they have a comparativeadvantage, increasing the production of society as a whole, and improving everyone'sstandard of living.7.Prior to the advent of the euro, the then fifteen members of the European Union hadtheir own currencies.As of 2004, Great Britain, Denmark, and Sweden retained2Instructor's Manual t/a Cecchetti:Money,Banking,andFinancial Markets

Chapter 2 Money Instructor’s Manual t/a Cecchetti: Money, Banking, and Financial Markets 2 c. As the Brieonian economy grows, the use of money will increase. Brieonians will be motivated to find a more convenient form of money. Eventually, the government would probably issue paper currency. 4. When you make a credit card purchase, the merchant allows you to leave with the goods. Why? Have you made a final payment? Answer: No; the merchant allows you to leave because he has been paid by the bank that issued your credit card, but you still have to pay back the credit card company. 5. Describe at least three ways you could pay for your morning cup of coffee. What are the advantages and disadvantages of each? Answer: You could use money, a check, a debit card, or a credit card. Money: This is the most likely to be accepted, but it means you have to replenish your supply periodically. Check: The least likely to be accepted, and it means you have to walk around with your checkbook. But the funds remain in your bank account for the time it takes the check to make its way through the clearing system. Debit Card: This is very convenient, and likely to be accepted. But it means immediate withdrawal of the funds from your account. (This is probably the cheapest option for the merchant). Credit Card: This allows you to get the cup of coffee and pay later. But you will eventually have to pay. The merchant might not like it, thought, since it is expensive. 6. Explain how money encourages specialization, and how specialization improves everyone’s standard of living. Answer: Without money, people have to barter to exchange goods and services. This requires a “double coincidence of wants,” which makes it difficult to specialize. In the example in the text, a plumber is buying groceries; if the grocer doesn’t need a plumbing repair, but does need the outside of his store painted, the plumber may decide to paint the store in order to pay for his groceries even though it is not what he does best. When money is used, people are free to specialize in areas in which they have a comparative advantage, increasing the production of society as a whole, and improving everyone’s standard of living. 7. Prior to the advent of the euro, the then fifteen members of the European Union had their own currencies. As of 2004, Great Britain, Denmark, and Sweden retained

Chapter2 Moneytheir own currencies, as did the10 additional countriesthat joined the EU on May1ofthat year.Theremaining12countriesadopted theeuro.Whataretheadvantagesofa common currencyfor someonewho istraveling through Europe?AnswerEach country has the same unit of account, making it easier for a traveler to compareprices indifferent countries.The traveler also saves the costs ofexchanging currencies.8.What must be the characteristics of a purely electronic substitutefor cash if mostpeople are to stopusing currency?Answer:Peopleneed tobe abletouse it as ameans of payment everywhere theynormallyuse currency.It should be used as a unit of account, and even though its primary usewill not be as a store of value, people should still trust that it will retain its value fromday-to-day.It should probably be issued by the government.9.Using the current level of M2 from the Federal Reserve's web site, compute thequantityof moneydivided bythe (approximate)population of the United States.Doyou think that result is large?Why or why not?Answer:The February 2004 level of M2 was $6127.625 billion.Dividing this by 280million equals $21,884.38.This seems like a lot, but M2 includes money market mutualfund shares, money market deposit accounts, small-denomination time deposits, checkingaccounts,and traveler's checks inadditionto currency in thehands of thepublic.Largeinvestments in CDs and money market mutual funds are what skewthe average.10.Using data from the Federal Reserve's web site, compute thefour-quarter percentchange in M1 and M2 since 1980.Use the data to reproduce Figure 2.3.Commenton the pattern over the lastfiveyears.Would it matter which of the two monetaryaggregates you looked at?Data are availablefromhttp://research.stlouisfed.org/fred2/and canbe downloadedinto a spreadsheet.11. Using data from the Federal Reserve's web site update the numbers in Table 2.1.Comment the differences between the tableyou have constructed and the one ina.the text.b.What has happened to the amount of currency outstanding per U.S. citizen? Canyou explain the change?Thedataareavailablefromhttp://www.federalreserve.gov/releases/3Instructor's Manual t/a Cecchetti:Money,Banking,and Financial Markets

Chapter 2 Money Instructor’s Manual t/a Cecchetti: Money, Banking, and Financial Markets 3 their own currencies, as did the 10 additional countries that joined the EU on May 1 of that year. The remaining 12 countries adopted the euro. What are the advantages of a common currency for someone who is traveling through Europe? Answer: Each country has the same unit of account, making it easier for a traveler to compare prices in different countries. The traveler also saves the costs of exchanging currencies. 8. What must be the characteristics of a purely electronic substitute for cash if most people are to stop using currency? Answer: People need to be able to use it as a means of payment everywhere they normally use currency. It should be used as a unit of account, and even though its primary use will not be as a store of value, people should still trust that it will retain its value from day-to-day. It should probably be issued by the government. 9. Using the current level of M2 from the Federal Reserve’s web site, compute the quantity of money divided by the (approximate) population of the United States. Do you think that result is large? Why or why not? Answer: The February 2004 level of M2 was $6127.625 billion. Dividing this by 280 million equals $21,884.38. This seems like a lot, but M2 includes money market mutual fund shares, money market deposit accounts, small-denomination time deposits, checking accounts, and traveler’s checks in addition to currency in the hands of the public. Large investments in CDs and money market mutual funds are what skew the average. 10. Using data from the Federal Reserve’s web site, compute the four-quarter percent change in M1 and M2 since 1980. Use the data to reproduce Figure 2.3. Comment on the pattern over the last five years. Would it matter which of the two monetary aggregates you looked at? Data are available from http://research.stlouisfed.org/fred2/ and can be downloaded into a spreadsheet. 11. Using data from the Federal Reserve’s web site update the numbers in Table 2.1. a. Comment the differences between the table you have constructed and the one in the text. b. What has happened to the amount of currency outstanding per U.S. citizen? Can you explain the change? The data are available from http://www.federalreserve.gov/releases/

Chapter2Money12.Current encryption technology,known as Pretty Good Privacy, is thought to beunbreakable. What would be the impact on the demand for money of a news reportthatsomeonehasbrokenthecode?Answer:Peoplewould wanttohold their money in cash (or in demand deposit accounts sincethose are insured by the government).13.Despite the efforts of the United States Treasury and the Secret Service, someonediscovers a cheapway to counterfeit $1oo bills.Howwill this discovery affect theeconomy?Answer:People will be unwilling to accept $100 bills as payment and will require payment viacheck, credit card, debit card, or electronic transfer instead.Theoretically,inflationcouldresult ifthe supply ofmoneywas increased byalarge enoughamount.14. You open the morning paper and discover that busloads of pickpockets have traveledto your city.What will be the impact on your desire to carry variousforms ofmoney?Answer:Peoplewill hold less cash.They will wanttokeepmoney indemand depositaccounts so that they can pay for goods and services using checks or electronic payments15. Over a nine-year period in the 16t century, King Henry VIII reduced the silvercontent of the British pound to one-sixth its initial value.Why do you think he didso?What do you think happened to theuse of pounds as a means of payment?Ifyou held both the old and new pounds, which would you usefirst? Why?Answer:King Henry needed to silver to pay for wars.The use of pounds as a means ofpayment declined because people could not be sure how much silver each coin containedPeople spent the new coins first since the old coins had a higher intrinsic value4Instructor'sManualt/aCecchetti:Money,Banking,andFinancial Markets

Chapter 2 Money Instructor’s Manual t/a Cecchetti: Money, Banking, and Financial Markets 4 12. Current encryption technology, known as Pretty Good Privacy, is thought to be unbreakable. What would be the impact on the demand for money of a news report that someone has broken the code? Answer: People would want to hold their money in cash (or in demand deposit accounts since those are insured by the government). 13. Despite the efforts of the United States Treasury and the Secret Service, someone discovers a cheap way to counterfeit $100 bills. How will this discovery affect the economy? Answer: People will be unwilling to accept $100 bills as payment and will require payment via check, credit card, debit card, or electronic transfer instead. Theoretically, inflation could result if the supply of money was increased by a large enough amount. 14. You open the morning paper and discover that busloads of pickpockets have traveled to your city. What will be the impact on your desire to carry various forms of money? Answer: People will hold less cash. They will want to keep money in demand deposit accounts so that they can pay for goods and services using checks or electronic payments. 15. Over a nine-year period in the 16th century, King Henry VIII reduced the silver content of the British pound to one-sixth its initial value. Why do you think he did so? What do you think happened to the use of pounds as a means of payment? If you held both the old and new pounds, which would you use first? Why? Answer: King Henry needed to silver to pay for wars. The use of pounds as a means of payment declined because people could not be sure how much silver each coin contained. People spent the new coins first since the old coins had a higher intrinsic value