MONEY AND BANKING CONNECT
HOMEWORK EXAM 2025 QUESTIONS
AND ANSWERS
You visit a tropical island that has only four goods in its economy—oranges, pineapples,
coconuts, and bananas. There is no money in this economy.
a. How many price pairs are possible in this economy? (You should check your answer using the
n(n − 1)/2 formula where n is the number of goods.)
b. An islander suggests designating oranges as the means of payment and unit of account for
the economy. How many prices would there be if her suggestion were followed? - ANS A: 6
B: 3
If money growth is related to inflation, what would you expect to happen to the inflation rates
of countries that join a monetary union and adopt a common currency such as the euro? -
ANS Once countries join a monetary union, they effectively share a common money supply.
Given the link between money growth and inflation, you would expect the inflation rates of
these countries to converge.
Under what circumstances might money in the form of currency be the best option as a store of
value?
1 @COPYRIGHT THESTAR 2025/2026
, If there were deflation in the economy, then paper currency would ___ in value. When
deflation occurs, overall prices in the economy are ___ and so the notes you hold have ___
purchasing power. During periods of deflation, prices of assets often ___ and so currency might
be an attractive option as a store of value. - ANS Increase
Falling
More
Fall
You receive a check drawn on another bank and deposit it into your checking account. Even
though this is a "demand deposit," the funds are not immediately available for your use. Why?
Would your answer change if the check is drawn on the account of another customer of your
own bank? - ANS Funds drawn on another bank are not immediately available until the funds
are transferred through the check-clearing process.
Yes. The funds will be internally transferred, so the funds may be available almost immediately.
Under what circumstances might you expect barter to reemerge in an economy that has fiat
money as a means of payment? - ANS If there are periods of high inflation and the public
loses confidence or trust in fiat money, barter may reemerge.
Consider an economy that only produces and consumes two goods— food and apparel.
Suppose the inflation rate based on the consumer price index is higher during the year than
that based on the GDP deflator. Assuming underlying tastes and preferences in the economy
are the same, what can you say about food and apparel price movements during the year? -
ANS The prices of food and apparel must have changed at different rates, causing consumers
to substitute one of the goods for the other. Since the GDP deflator is calculated based on what
is actually purchased, it takes that substitution in to account.
2 @COPYRIGHT THESTAR 2025/2026
HOMEWORK EXAM 2025 QUESTIONS
AND ANSWERS
You visit a tropical island that has only four goods in its economy—oranges, pineapples,
coconuts, and bananas. There is no money in this economy.
a. How many price pairs are possible in this economy? (You should check your answer using the
n(n − 1)/2 formula where n is the number of goods.)
b. An islander suggests designating oranges as the means of payment and unit of account for
the economy. How many prices would there be if her suggestion were followed? - ANS A: 6
B: 3
If money growth is related to inflation, what would you expect to happen to the inflation rates
of countries that join a monetary union and adopt a common currency such as the euro? -
ANS Once countries join a monetary union, they effectively share a common money supply.
Given the link between money growth and inflation, you would expect the inflation rates of
these countries to converge.
Under what circumstances might money in the form of currency be the best option as a store of
value?
1 @COPYRIGHT THESTAR 2025/2026
, If there were deflation in the economy, then paper currency would ___ in value. When
deflation occurs, overall prices in the economy are ___ and so the notes you hold have ___
purchasing power. During periods of deflation, prices of assets often ___ and so currency might
be an attractive option as a store of value. - ANS Increase
Falling
More
Fall
You receive a check drawn on another bank and deposit it into your checking account. Even
though this is a "demand deposit," the funds are not immediately available for your use. Why?
Would your answer change if the check is drawn on the account of another customer of your
own bank? - ANS Funds drawn on another bank are not immediately available until the funds
are transferred through the check-clearing process.
Yes. The funds will be internally transferred, so the funds may be available almost immediately.
Under what circumstances might you expect barter to reemerge in an economy that has fiat
money as a means of payment? - ANS If there are periods of high inflation and the public
loses confidence or trust in fiat money, barter may reemerge.
Consider an economy that only produces and consumes two goods— food and apparel.
Suppose the inflation rate based on the consumer price index is higher during the year than
that based on the GDP deflator. Assuming underlying tastes and preferences in the economy
are the same, what can you say about food and apparel price movements during the year? -
ANS The prices of food and apparel must have changed at different rates, causing consumers
to substitute one of the goods for the other. Since the GDP deflator is calculated based on what
is actually purchased, it takes that substitution in to account.
2 @COPYRIGHT THESTAR 2025/2026
