Answers to these questions can be found in the course notes

Answers to these questions can be found in the course notes, the textbook and on the internet. You may need to refer to more than one source in order to answer a question completely.

Double spaced/typed answers. Graphs may be drawn neatly by hand

Question 1

There are three types of money: commodity money, commodity-backed money, and fiat money. What type of money is used in each of the following situations?

a. Bottles of rum were used to pay for goods in colonial Australia.

b. Salt was used in many European countries as a medium of exchange.

c. For a brief time, Germany used paper money (the “Rye Mark”) that could be redeemed for a certain amount of rye, a type of grain.

d. The tow of Ithaca, New York, prints its own currency, the Ithaca HOURS, which can be used to purchase local goods and services.

Question 2

The Congressional Research Service estimates that at least $45 million of counterfeit U.S. $100 notes produced by the North Korean government are in circulation. (3 points)

a. Why do U.S. taxpayers lose because of North Korea’s counterfeiting?

b. As of September 2008, the interest rate earned on one-year Treasury bills was 2.2%. At a 2.2% rate of interest, what is the amount of money U.S. taxpayers are losing per year because of the $45 million in counterfeit notes?

Question 3

Go to the FOMC page of the Federal Reserve Board’s website: (http://www.federalreserve.gov/FOMC/) to find the statement issued after the most recent FOMC meeting. (4 points)

a. What is the target federal funds rate?

b. Is the target federal funds rate different from the target federal funds rate in the previous FOMC statement? If yes, by home much does it differ?

c. Does the statement comment on current macroeconomic conditions in the United States? How does it describe the U.S. economy?

d. Find the discount rate. What is it? (Wall Street Journal is a source)

Solution

Commodity money refers to a medium of exchange that may be transformed into a commodity, useful in production or consumption.

Commodity Backed Money is where the quantity of money is backed with a commodity, which it can be traded in with at request.

Fiat money is currency that a government has declared to be legal tender, but is not backed by a physical commodity

1a. a bottle of rum is commodity money because it has other use

1b. Salt is commodity money since it has other use

1c. The Rye Mark is commodity backed money since its ultimate value is guaranteed by a promise that it can be converted into valuable goods.

1d. Ithaca HOURS are flat money since their value derives from their status as a means of payment in Ithaca.