Terms:

1. Commodity money: Tiền hàng hóa

2. Currency: Tiền tệ
3. e-cash: Tiền mặt điện tử
4. electronic money (e-money): Tiền điện tử
5. fiat money : Tiền pháp định
6. Hyperinflation: sieêu lạm phát
7. Income: Lợi tức
8. Liquidity: Tính thanh khoản
9. M1: Cung tiền giao dịch
10. M2: Bao gồm M1 và tiền tiết kiệm
11. medium of exchange: Vật trung gian để trao đổi
12. monetary aggregates: Mức lưu thông tiền tệ
13. payments system: Hệ thống thanh toán
14. smart card: Thẻ thông minh
15. store of value: Lưu trữ giá trị
16. unit of account: Đơn vị tính toán
17. wealth: sự giàu có
18. face value (par value): mệnh giá
19. fixed-payment loan (fully amortized loan): Vay hoàn trả cố định
20. interest-rate risk: rủi ro lãi suất
21. nominal interest rate: lãi suất danh nghĩa
22. present value: Giá trị hiện tại
23. rate of capital gain: Lãi về vốn
24. real interest rate: Lãi suất thực tế
25. return (rate of return): Tỷ suất hoàn vốn
26. yield to maturity: Lợi suất đáo hạn

Question:
1. Why is simply counting currency an inadequate measure of money?
 Since a lot of other assets have liquidity properties that are similar to currency
but can be used as money to purchase goods and services, not counting them
would understate an economy’s access to liquidity for transactions purposes.
For this reason, counting assets such as checking deposits or savings accounts
more accurately reflects the stock of assets that can be considered money.
2. In prison, cigarettes are sometimes used among inmates as a form of payment.
How is it possible for cigarettes to solve the “double coincidence of wants”
problem, even if a prisoner does not smoke?
 Even if the prisoner is a non-smoker, he or she knows that others in the prison
will accept cigarettes as a form of payment for goods and services. Thus, rather
than having to barter and trade favors, cigarettes solve the double coincidence
of wants problem because both parties involved in the transaction are willing
and able to use them to “purchase” goods or services.
3. Three goods are produced in an economy by three individuals:
Good Producer
Apples Orchard owner
Bananas Banana grower
Chocolate Chocolatier
 Because the orchard owner likes only bananas but the banana grower doesn't
like apples, the
banana grower will not want apples in exchange for his bananas, and they will
not trade. Similarly, the chocolatier will not be willing to trade with the banana
grower because she does not like bananas. The orchard owner will not trade
with the chocolatier because he doesn't like chocolate. Hence, in a barter
economy, trade among these three people may well not take place, because in
no case is there a double coincidence of wants. However, if money is
introduced into the economy, the orchard owner can sell his apples to the
chocolatier and then use the money to buy bananas from the banana grower.
Similarly, the banana grower can use the money he receives from the orchard
owner to buy chocolate from the chocolatier, and the chocolatier can use the
money to buy apples from the orchard owner. The result is that the need for a
double coincidence of wants is eliminated, and everyone is better off because
all three producers are now able to eat what they like best.
4. Why did cavemen not need money?
 Cavemen did not need money. In their primitive economy, they did not
specialize in producing one type of good and they had little need to trade with
other cavemen.
5. Most of the time it is quite difficult to separate the three functions of money.
Money performs its three functions at all times, but sometimes we can stress one
in particular. For each of the following situations, identify which function of
money is emphasized.
a. Brooke accepts money in exchange for performing her daily tasks at her office,
since she knows she can use that money to buy goods and services.
=> Medium of exchange
 b. Tim wants to calculate the relative value of oranges and apples, and therefore
checks the price per pound of each of these goods as quoted in currency units.
=> Unit of account
c. Maria is currently pregnant. She expects her expenditures to increase in the
future and decides to increase the balance in her savings account.
 Store of account
6. 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?
 Because of rapid inflation, the domestic currency, the real, is a poor store of
value. Thus many people would rather hold dollars, which are a better store of
value, and use them in their daily shopping.
7. Was money a better store of value in the United States in the 1950s than in the
1970s? Why or why not? In which period would you have been more willing to
hold money?
 Yes, it was. Because money was losing value at a slower rate (the inflation rate
was lower) in the 1950s than in the 1970s, it was a better store of value then,
and you would have been willing to hold more of it.
8. Why have some economists described money during a hyperinflation as a “hot
potato” that is quickly passed from one person to another?
 Money loses its value at an extremely rapid rate in hyperinflation, so you want
to hold it for as short a time as possible. Thus money is like a hot potato that is
quickly passed from one person to another.
9. Why were people in the United States in the nineteenth century sometimes willing
to be paid by check rather than with gold, even though they knew there was a
possibility that the check might bounce?
 Because a check was so much easier to transport than gold, people would
frequently rather be paid by check even if there was a possibility that the check
might bounce. In other words, the lower transactions costs involved in
handling checks made people more willing to accept them.
10. Would a dollar tomorrow be worth more to you today when the interest rate is
20% or when it is 10%?
 It would be worth 1/(1 + 0.20) = $0.83 when the interest rate is 20%, rather
than 1/(1 + 0.10)= $0.91 when the interest rate is 10%. Thus, a dollar tomorrow
is worth less with a higher interest rate today.
11. Write down the formula that is used to calculate the yield to maturity on a twenty-
year 10% coupon bond with a $1,000 face value that sells for $2,000.
 $2,000 = $100/(1 + i) + $100/(1 + i)2 + . . . + $100/(1 + i)20 + $1,000/(1 + i)20.
Solving for I gives the yield to maturity.
12. To help pay for college, you have just taken out a $1,000 government loan that
makes you pay $126 per year for 25 years. However, you don't have to start
making these payments until you graduate from college two years from now. Why
is the yield to maturity necessarily less than 12%? (This is the yield to maturity on
a normal $1,000 fixed-payment loan on which you pay $126 per year for 25
years.)
 If the interest rate were 12%, the present discounted value of the payments on
the government loan are necessarily less than the $1,000 loan amount because
they do not start for two years. Thus the yield to maturity must be lower than
12% in order for the present discounted value of these payments to add up to
$1,000.
13. Interest rates were lower in the mid-1980s than in the late 1970s, yet many
economists have commented that real interest rates were actually much higher in
the mid-1980s than in the late 1970s. Does this make sense? Do you think that
these economists are right?
 Nominal Rate = Real Rate + Inflation
=> Real Rate = Nominal Rate - Inflation
Given the expression above, it is clear that the relation of nominal rates for two
distinct periods will not necessarily correspond to the relation of real rates for
the same periods. Inflation can be a highly differentiating factor.
In this problem, nominal rates were lower in the mid-1980s than the late 1970s.
However, because inflation was soaring in the late 1970s, real interest rates
were actually higher in the mid-1980s than the late 1970s. Therefore, the
statement above makes sense and is defensible.
14. Retired persons often have much of their wealth placed in savings accounts and
other interest-bearing investments, and complain whenever interest rates are low.
Do they have a valid complaint?
 Expected inflation is falling at a slower rate than nominal interest rates