ECON 2120 Exam Updated Questions & Answers
QUESTIONS & ANSWERS
The economic definition of money is
any asset that people are generally willing to accept in exchange for goods and services
The use of money
reduces the transaction costs of exchange, eliminates the double coincidence of wants, and
allows for greater specialization
A double coincidence of wants refers to
the fact that for a barter trade to take place between two people, each person must want what the
other one has
Functions of money
medium of exchange, unit of account, store of value, standard of deferred payment
Money serves as a unit of account when
prices of goods and services are stated in terms of money
Money serves as a standard of deferred payment when
payments agreed to today but made in the future are in terms of money
What conditions make a good suitable for use as a medium of exchange?
1. must be acceptable to most buyers and sellers
2. should be durable, valuable relative to its weight, and divisible
3. should be of standardized quality, so that any two units are identical
, What is fiat money?
money that is authorized by a central bank and that does not have to be exchanged for gold or
some other commodity money
What is included in M2 but not M1?
noninstitutional money market mutual fund shares
The Federal Reserve uses two definitions of the money supply, M1 and M2, because
M1 is a narrow definition focusing more on liquidity, whereas M2 is a broader definition of the
money supply
Components of the M1 measure of the money supply
checking account deposits in banks, currency in circulation, savings account deposits in banks
Small-denomination time deposits and noninstitutional money market fund shares are
included only in M2
Suppose you decide to withdraw $100 in currency from your checking account. What is the
effect on M1? Ignore any actions the bank may take as a result of your having withdrawn
the $100.
M1 remains unchanged
Suppose you withdraw $1,000 from a money market mutual fund and deposit the funds in
your bank checking account. How will this action affect M1 and M2?
M2 will not be affected, but M1 will increase
QUESTIONS & ANSWERS
The economic definition of money is
any asset that people are generally willing to accept in exchange for goods and services
The use of money
reduces the transaction costs of exchange, eliminates the double coincidence of wants, and
allows for greater specialization
A double coincidence of wants refers to
the fact that for a barter trade to take place between two people, each person must want what the
other one has
Functions of money
medium of exchange, unit of account, store of value, standard of deferred payment
Money serves as a unit of account when
prices of goods and services are stated in terms of money
Money serves as a standard of deferred payment when
payments agreed to today but made in the future are in terms of money
What conditions make a good suitable for use as a medium of exchange?
1. must be acceptable to most buyers and sellers
2. should be durable, valuable relative to its weight, and divisible
3. should be of standardized quality, so that any two units are identical
, What is fiat money?
money that is authorized by a central bank and that does not have to be exchanged for gold or
some other commodity money
What is included in M2 but not M1?
noninstitutional money market mutual fund shares
The Federal Reserve uses two definitions of the money supply, M1 and M2, because
M1 is a narrow definition focusing more on liquidity, whereas M2 is a broader definition of the
money supply
Components of the M1 measure of the money supply
checking account deposits in banks, currency in circulation, savings account deposits in banks
Small-denomination time deposits and noninstitutional money market fund shares are
included only in M2
Suppose you decide to withdraw $100 in currency from your checking account. What is the
effect on M1? Ignore any actions the bank may take as a result of your having withdrawn
the $100.
M1 remains unchanged
Suppose you withdraw $1,000 from a money market mutual fund and deposit the funds in
your bank checking account. How will this action affect M1 and M2?
M2 will not be affected, but M1 will increase
