Money and Inflation Quick Check
Which event indicates that deflation is occurring?
(1 point)
Responses
A savings account can suddenly buy much more than before.
A savings account can suddenly buy much more than before.
The profits of a clothing factory increase rapidly.
The profits of a clothing factory increase rapidly.
The length of time it takes to pay off a home loan decreases by five years.
The length of time it takes to pay off a home loan decreases by five years.
A local store begins offering ice cream bars at two for $5.00 instead of three for $5.00.
Deflation is defined as a decrease in the general price level of goods and services. When deflation occurs, the value of money goes up, meaning that consumers can buy more with the same amount of money.
From the provided options, the one that indicates deflation is occurring would be:
"A savings account can suddenly buy much more than before."
This is because, during deflation, the purchasing power of money increases as prices decline, allowing savings to have more value relative to goods and services. None of the other options provided directly indicate that deflation is occurring:
- The profits of a clothing factory increasing rapidly could be due to various factors, such as increased demand or reduced costs, and does not necessarily mean that deflation is happening.
- The length of time it takes to pay off a home loan could decrease for reasons other than deflation, such as an individual making larger payments or securing a loan with a lower interest rate.
- A local store offering ice cream bars at a discounted rate could simply be a promotional offer or a response to competition and doesn't necessarily reflect a general decrease in price levels across the economy.
Therefore, the best answer to indicate deflation is the scenario where a savings account can buy much more than before.
How does money differ from barter?
(1 point)
Responses
Money is mostly important as a way to get goods and services.
Money is mostly important as a way to get goods and services.
Money is used to exchange goods and services.
Money is used to exchange goods and services.
Money has value only because people agree that it has value.
Money has value only because people agree that it has value.
Money has been used for thousands of years.
Money differs from barter in several fundamental ways, one of which is that money serves as a medium of exchange that is widely accepted in return for goods and services, whereas barter involves trading goods or services directly for other goods or services without using a medium of exchange.
From the provided options, the statement that best explains how money differs from barter is:
"Money has value only because people agree that it has value."
The reasons for this are as follows:
- "Money is mostly important as a way to get goods and services." This statement is true for both money and barter; both are ways to obtain goods and services, but this does not highlight the difference between the two.
- "Money is used to exchange goods and services." While this statement is accurate, it doesn’t differentiate money from barter, as barter is also a method of exchanging goods and services, just without the intermediary of money.
- "Money has value only because people agree that it has value." This statement captures a unique characteristic of money—its value is not inherent, but rather derived from a collective belief and agreement in its worth as a medium of exchange. This is unlike bartered items, which have intrinsic value based on their use or consumption.
- "Money has been used for thousands of years." This statement does not distinguish money from barter, as barter predates the invention of money and was used for exchanges long before money was introduced.
Therefore, the key difference is that money is a standardized medium of exchange that holds no intrinsic value; its value is purely based on societal consensus. In contrast, barter transactions directly involve goods or services that have an intrinsic value or utility to the participants.
Bryan needs a new backpack. He compares the prices of three different backpacks at a local store to find the best deal. Which function of money is Bryan demonstrating?
(1 point)
Responses
unit of account
unit of account
store of value
store of value
acceptance of payment
acceptance of payment
medium of exchange
Bryan is demonstrating the "unit of account" function of money.
When Bryan compares the prices of different backpacks, he is using money as a measure to determine the relative value of these goods. A unit of account is a standard numerical unit of measurement of the market value of goods, services, and other transactions. By expressing the prices of the backpacks in a common unit of account (money), Bryan is able to make an informed decision about which backpack represents the best value for the price. This is one of the key functions of money, allowing consumers and businesses to compare the value of different goods and services.
To determine which event indicates that deflation is occurring, we need to understand what deflation means. Deflation refers to a decrease in the general price level of goods and services in an economy over time. This results in an increase in the purchasing power of money.
Now, let's analyze the given responses:
1. A savings account can suddenly buy much more than before.
- This response suggests that the value of money has increased, indicating deflation.
2. The profits of a clothing factory increase rapidly.
- The profits of a clothing factory increasing rapidly do not necessarily indicate deflation, as it can be influenced by various factors such as increased demand or improved efficiency.
3. The length of time it takes to pay off a home loan decreases by five years.
- The decrease in the length of time to pay off a home loan does not directly indicate deflation. It might be the result of factors like lower interest rates or changes in the borrower's financial situation.
4. A local store begins offering ice cream bars at two for $5.00 instead of three for $5.00.
- This response suggests that the store is offering a discount on ice cream bars, but it does not directly indicate deflation.
Considering the above analysis, the correct response that indicates deflation is:
A savings account can suddenly buy much more than before.
By observing that the savings account has increased purchasing power, we can infer that the overall price level has decreased, indicating deflation.