Test on The Nature and Theories of Money

Question 1: David Ricardo, a proponent of the Currency School, believed that money, as a neutral measure of value, could be effectively controlled by central authorities to manage economic interests.

A. Ano

B. Ne

Explanation: Ricardo's concept of 'neutral' money implied that it 'should not be controlled by any interest because, in the final analysis, it could not be effectively controlled'. He advocated for money to be a standard referred to an object in nature, opposing the idea of controlling it.

Question 2: What was a significant development regarding bills and promissory notes by the sixteenth century?

A. They were widely established in law as a contract of payment legally transferable beyond the original signatories.

B. They became the primary form of payment, completely replacing coined currency in merchant networks.

C. Their value was directly tied to the intrinsic precious metal content of the issuer.

D. They were exclusively issued by state authorities for tax payments, replacing merchant IOUs.

Explanation: The study materials state that 'By the sixteenth century, bills and promissory notes were widely established in law as a contract of payment which was legally transferable beyond the original signatories.' The other options are incorrect because the materials do not suggest they completely replaced coined currency, their value wasn't tied to intrinsic metal content, and while states did issue IOUs, bills and promissory notes were not exclusively issued by them, nor did this replace merchant IOUs in general.

Question 3: The story of Bob and Joe's journey to Derby Day was used to illustrate the concept of the velocity of money.

A. Ano

B. Ne

Explanation: The study materials state that Dennis Robertson illustrated the velocity of money with the story of Bob and Joe's journey to Derby Day at Epsom races.

Question 4: According to the study materials, which of the following statements accurately describe a key incompatibility or distinction between Commodity-Exchange Theory and Credit Theory regarding the emergence of money?

A. Commodity-Exchange Theory posits that money of account arises from bilateral bargaining and 'higgling and haggling' in a barter system.

B. Credit Theory suggests that genuine markets with price signals require the pre-existence of a money of account, reversing the causal link proposed by Commodity-Exchange Theory.

C. Commodity-Exchange Theory holds that money evolved spontaneously from barter to resolve its inherent inefficiencies, a claim for which historical evidence is lacking.

D. Credit Theory emphasizes that the 'velocity' of money is crucial for understanding how the same quantity of a physical medium of exchange can finance more transactions.

Explanation: Commodity-Exchange Theory contends that money of account emerges from 'higgling and haggling' in barter, as stated in the materials. Credit Theory, conversely, argues that genuine markets in which price signals are posted presuppose the existence of money of account, representing a reversal of the causal link. The study materials also note that Commodity-Exchange Theory's claim that money evolved spontaneously to remedy barter's inefficiencies lacks historical evidence. The concept of the 'velocity' of money, however, is presented as a strategy used by Commodity/Quantity Theory to maintain its relevance, not a characteristic of Credit Theory.

Question 5: Georg Knapp argued that it is absurd to comprehend money without acknowledging the role of the state.

A. Ano

B. Ne

Explanation: Knapp believed that it was 'absurd to understand money without the idea of the state', emphasizing the state's fundamental role in defining money.