ECS3701 MONETARY ECONOMICS EXAM
PACK 2026 – COMPLETE
SECTION 1: INTRODUCTION TO MONEY AND BANKING
Questions 1–20
Question 1
What is money?
Correct answer: Money is anything that is generally accepted as payment for goods and
services or in the repayment of debts. It serves three main functions: medium of exchange, unit
of account, and store of value.
Question 2
What are the three functions of money?
Correct answer: (1) Medium of exchange – eliminates the double coincidence of wants problem
in barter. (2) Unit of account – provides a standard measure of value. (3) Store of value –
preserves purchasing power over time.
Question 3
What is the difference between commodity money and fiat money?
Correct answer: Commodity money has intrinsic value (e.g., gold, silver). Fiat money has no
intrinsic value and is declared money by government decree (e.g., paper currency).
,Question 4
What is the double coincidence of wants problem?
Correct answer: In barter trade, each party must have exactly what the other wants at the same
time and place. Money solves this problem by serving as a medium of exchange.
Question 5
Explain the concept of liquidity.
Correct answer: Liquidity refers to the ease and speed with which an asset can be converted
into a medium of exchange without loss of value. Money is the most liquid asset.
Question 6
What is M1 in money supply measurement?
Correct answer: M1 is the narrowest measure of money supply, consisting of currency in
circulation, demand deposits (checkable deposits), traveler's checks, and other checkable
deposits.
Question 7
What is M2 in money supply measurement?
Correct answer: M2 includes M1 plus savings deposits, small-denomination time deposits,
money market deposit accounts, and money market mutual fund shares.
Question 8
How does electronic money (e-money) differ from traditional money?
Correct answer: E-money exists in electronic form and is stored on devices like cards or
smartphones. It represents fiat money but in digital form, enabling electronic transactions.
,Question 9
What is the difference between the money stock and the money supply?
Correct answer: Money stock refers to the total quantity of money in circulation at a given time.
Money supply is the same concept – the terms are often used interchangeably.
Question 10
Why is the store of value function of money imperfect during inflation?
Correct answer: During inflation, the purchasing power of money declines, meaning money
does not hold its value well over time. This erodes the store of value function.
SECTION 2: FINANCIAL MARKETS AND INTERMEDIARIES
Questions 11–30
Question 11
Distinguish between direct and indirect finance.
Correct answer: Direct finance occurs when borrowers sell securities directly to lenders in
financial markets. Indirect finance involves financial intermediaries (like banks) that stand
between savers and borrowers.
Question 12
What are financial intermediaries?
Correct answer: Financial intermediaries are institutions that borrow funds from savers and lend
them to borrowers, including banks, insurance companies, pension funds, and mutual funds.
, Question 13
What is the lemons problem in financial markets?
Correct answer: The lemons problem arises when asymmetric information prevents buyers from
distinguishing between good and bad quality securities. This can cause markets to fail as good
securities are driven out.
Question 14
What is the difference between primary and secondary markets?
Correct answer: Primary markets are where new securities are issued and sold to investors for
the first time. Secondary markets are where existing securities are traded among investors.
Question 15
What is the difference between money markets and capital markets?
Correct answer: Money markets trade short-term debt instruments (maturity less than one year),
while capital markets trade long-term securities (equities and bonds with longer maturities).
Question 16
What are the functions of financial intermediaries?
Correct answer: (1) Reduce transaction costs. (2) Manage risk through diversification. (3)
Address asymmetric information problems (adverse selection and moral hazard). (4) Provide
liquidity.
Question 17
What is adverse selection in financial markets?
PACK 2026 – COMPLETE
SECTION 1: INTRODUCTION TO MONEY AND BANKING
Questions 1–20
Question 1
What is money?
Correct answer: Money is anything that is generally accepted as payment for goods and
services or in the repayment of debts. It serves three main functions: medium of exchange, unit
of account, and store of value.
Question 2
What are the three functions of money?
Correct answer: (1) Medium of exchange – eliminates the double coincidence of wants problem
in barter. (2) Unit of account – provides a standard measure of value. (3) Store of value –
preserves purchasing power over time.
Question 3
What is the difference between commodity money and fiat money?
Correct answer: Commodity money has intrinsic value (e.g., gold, silver). Fiat money has no
intrinsic value and is declared money by government decree (e.g., paper currency).
,Question 4
What is the double coincidence of wants problem?
Correct answer: In barter trade, each party must have exactly what the other wants at the same
time and place. Money solves this problem by serving as a medium of exchange.
Question 5
Explain the concept of liquidity.
Correct answer: Liquidity refers to the ease and speed with which an asset can be converted
into a medium of exchange without loss of value. Money is the most liquid asset.
Question 6
What is M1 in money supply measurement?
Correct answer: M1 is the narrowest measure of money supply, consisting of currency in
circulation, demand deposits (checkable deposits), traveler's checks, and other checkable
deposits.
Question 7
What is M2 in money supply measurement?
Correct answer: M2 includes M1 plus savings deposits, small-denomination time deposits,
money market deposit accounts, and money market mutual fund shares.
Question 8
How does electronic money (e-money) differ from traditional money?
Correct answer: E-money exists in electronic form and is stored on devices like cards or
smartphones. It represents fiat money but in digital form, enabling electronic transactions.
,Question 9
What is the difference between the money stock and the money supply?
Correct answer: Money stock refers to the total quantity of money in circulation at a given time.
Money supply is the same concept – the terms are often used interchangeably.
Question 10
Why is the store of value function of money imperfect during inflation?
Correct answer: During inflation, the purchasing power of money declines, meaning money
does not hold its value well over time. This erodes the store of value function.
SECTION 2: FINANCIAL MARKETS AND INTERMEDIARIES
Questions 11–30
Question 11
Distinguish between direct and indirect finance.
Correct answer: Direct finance occurs when borrowers sell securities directly to lenders in
financial markets. Indirect finance involves financial intermediaries (like banks) that stand
between savers and borrowers.
Question 12
What are financial intermediaries?
Correct answer: Financial intermediaries are institutions that borrow funds from savers and lend
them to borrowers, including banks, insurance companies, pension funds, and mutual funds.
, Question 13
What is the lemons problem in financial markets?
Correct answer: The lemons problem arises when asymmetric information prevents buyers from
distinguishing between good and bad quality securities. This can cause markets to fail as good
securities are driven out.
Question 14
What is the difference between primary and secondary markets?
Correct answer: Primary markets are where new securities are issued and sold to investors for
the first time. Secondary markets are where existing securities are traded among investors.
Question 15
What is the difference between money markets and capital markets?
Correct answer: Money markets trade short-term debt instruments (maturity less than one year),
while capital markets trade long-term securities (equities and bonds with longer maturities).
Question 16
What are the functions of financial intermediaries?
Correct answer: (1) Reduce transaction costs. (2) Manage risk through diversification. (3)
Address asymmetric information problems (adverse selection and moral hazard). (4) Provide
liquidity.
Question 17
What is adverse selection in financial markets?
