Chapter 2: Money and the Payments System

Exercise 2.1

Describe at least three ways you could pay for your morning cup of coffee.

What are the advantages and disadvantages of each?

Method of payment	Advantages	Disadvantages

Exercise 2.2

You are the owner of a small sandwich shop. A buyer may offer one of several payment methods: cash, a check drawn on a bank, a credit card, or a debit card. Which of these forms of payment is the least costly for you? Explain why the others are more expensive.

• Cash

• Cheque

• Credit card

• Debit card

Exercise 2.3

Explain how money encourages specialization, and how specialization improves everyones standard of living.

Exercise 2.4

Give four examples of ACH transactions you might make.

• Most common form of electronic funds transfers is automated clearinghouse transaction (ACH).
• This is where funds move directly from one account to another.

Exercise 2.5

Could the dollar still function as the unit of account in a totally cashless society? Why yes, or why not? Explain.

Exercise 2.6

As of July 2016, 19 European Union countries have adopted the euro, while the remaining member countries have retained their own currencies. Discuss the advantages of a common currency for someone who is traveling through Europe.

Exercise 2.7

Why might each of the following commodities not serve well as money?

1. Tomatoes

2. Bricks

3. Cattle

Exercise 2.8

Suppose that despite the efforts of the U.S. Treasury and the Secret Service, someone discovers a cheap way to counterfeit $100 bills. What will be the impact of this discovery on the economy?

Exercise 2.9

1. Under what circumstances might you expect barter to re-emerge in an economy that has fiat money as a means of payment?

2. In what circumstances might money in the form of currency be the best option as a store of value?

3. Why might one doubt that current new forms of digital money, such as Bitcoin, will replace more traditional fiat currencies?

Exercise 2.10

Travelers cheques are a component of M1 and M2. Explain when, why, how and by who they are used.