Unit 5: Money, Financial Markets, and Monetary Policy
Introduction
*Money in the Economy
*What is Money
The word money means different things to different people.
Here are some ways in which economists do not use the word money:
1. How much money (income) did you earn last year?
2. Most of his money (wealth) is tied up in bonds.
3. It is almost impossible to get mortgage money (loans) in today’s market.
4. This country does not have enough money (productive resources) to increase both military and
social spending.
*The Functions of Money
1. A main function of money is to avoid the need for double coincidence of wants.
What is the name of this function?
Medium of exchange function
Correct. As a medium of exchange, money avoids the need for double coincidence of wants.
2. The standard of value function of money refers to money as
a method of measurement or comparison.
Correct. The standard of value makes money a method of measurement and comparison.
3. Which of the following is a function performed by a modern society's money?
Store of wealth
Correct. Store of wealth is a function of money.
4. Suppose you store part of your income in the form of money to be used 1 year from
now. Which function of money are those dollars performing?
Store of wealth
Correct. The dollars are acting as a store of wealth.
, 5. True or false. The ease with which an asset can be converted into the medium of
exchange is called liquidity.
True
Correct. The more an asset can be used as a medium of exchange, the more liquid it is considered.
6. True or false. If people doubt money's acceptability, then they will still using it as a
medium of exchange.
False
Correct. If people doubt money’s acceptability, they will not use it as a medium of exchange.
*Desirable Characteristics of Money
Scarcity
Portability
Durability - Perishable commodities.
Divisibility
Acceptability
*United States currency is fiat money. It is accepted because the government declares it to be “legal
tender for all debts, public and private.”
Forms of Money
*Modern coins are token money because their value as money is greater than the value of the metal they
contain.
7. Coins with a value less than the monetary value are
token money.
Correct. Coins with a value that is less than the monetary value are token money.
8. A Federal Reserve note is accepted as money by most Americans because
U.S. law establishes it as legal tender.
Correct. Money is accepted because the U.S. law established it as legal tender.
, 9. "Fill in the blank" question: The fact that money is legal tender increases its
acceptability.
Correct. Acceptability is increased by money as a legal tender.
10. Which of the following characteristics of money is important for considering how
well it will stand up under continued use?
Durability
Correct. Durability is important for the continued use of money.
11. True or false. Experience suggests that a good candidate for serving as money
should be somewhat scarce, portable, durable, divisible, and generally acceptable.
True
Correct. Money should possess all of those characteristics.
12. "Fill in the blank" question: Governments try to maintain the value of the money stock
by limiting the quantity of money they produce.
Correct. If money is limited, it retains its value.
*Monetary Aggregates and the Evolution of the Payment
System
M1, which is often referred to as the money supply, has the greatest liquidity. It consists of coins,
currency in non-bank hands, checkable deposits, and traveler's checks.
The M2 money supply is equal to M1, plus small-time and savings deposits, money market
accounts at banks and other financial institutions, and a few other specialized monetary assets.
13. According to the M1 definition, the money supply consists of currency held by the
public, plus
demand deposits and traveler's checks.
Correct. Demand deposits and traveler's checks are part of M1 monetary aggregate.
14. The M1 money supply includes
checkable deposit accounts.
, Correct. The M1 money supply does includes checkable deposit accounts.
15. Which of the following is included in M2, but not in M1?
Savings deposits
Correct. Savings deposits are included in M2, but not in M1.
16. How does M1 differ from M2?
All the items in M1 are used for transaction purposes, whereas all the items in M2 a are not.
Correct. All the items in M1 are used for transactions purposes, whereas all the items in M2 are not.
17. "Fill in the blank" question: Money is organized into monetary aggregates based on its
liquidity.
Correct. The liquidity of money is determined by the monetary aggregate in which they are included.
18. True or false. M1, which is often referred to as the money supply, consists of coins,
currency in non-bank hands, checkable deposits, and traveler's checks.
True
Correct. M1 is the monetary aggregate with the greatest liquidity.
*Banknotes, Checking Accounts, and Other Forms of Money
19. The U.S. currency that was first issued during the Civil War and not redeemable in
gold was called
greenbacks.
Correct. The U.S. currency issued during the Civil War was called greenbacks.
20. A banknote is
a promise entitling the bearer to an amount of gold on demand at the bank.
Correct. A banknote is a promise entitling the bearer to an amount of gold on demand at the
bank.
21. A function of the early goldsmith was to
provide a storehouse for gold and other metals.
Correct. A goldsmith used to provide a storehouse for gold and other metals.
22. A document that entitles the bearer to an amount of gold on demand at the bank is a
Introduction
*Money in the Economy
*What is Money
The word money means different things to different people.
Here are some ways in which economists do not use the word money:
1. How much money (income) did you earn last year?
2. Most of his money (wealth) is tied up in bonds.
3. It is almost impossible to get mortgage money (loans) in today’s market.
4. This country does not have enough money (productive resources) to increase both military and
social spending.
*The Functions of Money
1. A main function of money is to avoid the need for double coincidence of wants.
What is the name of this function?
Medium of exchange function
Correct. As a medium of exchange, money avoids the need for double coincidence of wants.
2. The standard of value function of money refers to money as
a method of measurement or comparison.
Correct. The standard of value makes money a method of measurement and comparison.
3. Which of the following is a function performed by a modern society's money?
Store of wealth
Correct. Store of wealth is a function of money.
4. Suppose you store part of your income in the form of money to be used 1 year from
now. Which function of money are those dollars performing?
Store of wealth
Correct. The dollars are acting as a store of wealth.
, 5. True or false. The ease with which an asset can be converted into the medium of
exchange is called liquidity.
True
Correct. The more an asset can be used as a medium of exchange, the more liquid it is considered.
6. True or false. If people doubt money's acceptability, then they will still using it as a
medium of exchange.
False
Correct. If people doubt money’s acceptability, they will not use it as a medium of exchange.
*Desirable Characteristics of Money
Scarcity
Portability
Durability - Perishable commodities.
Divisibility
Acceptability
*United States currency is fiat money. It is accepted because the government declares it to be “legal
tender for all debts, public and private.”
Forms of Money
*Modern coins are token money because their value as money is greater than the value of the metal they
contain.
7. Coins with a value less than the monetary value are
token money.
Correct. Coins with a value that is less than the monetary value are token money.
8. A Federal Reserve note is accepted as money by most Americans because
U.S. law establishes it as legal tender.
Correct. Money is accepted because the U.S. law established it as legal tender.
, 9. "Fill in the blank" question: The fact that money is legal tender increases its
acceptability.
Correct. Acceptability is increased by money as a legal tender.
10. Which of the following characteristics of money is important for considering how
well it will stand up under continued use?
Durability
Correct. Durability is important for the continued use of money.
11. True or false. Experience suggests that a good candidate for serving as money
should be somewhat scarce, portable, durable, divisible, and generally acceptable.
True
Correct. Money should possess all of those characteristics.
12. "Fill in the blank" question: Governments try to maintain the value of the money stock
by limiting the quantity of money they produce.
Correct. If money is limited, it retains its value.
*Monetary Aggregates and the Evolution of the Payment
System
M1, which is often referred to as the money supply, has the greatest liquidity. It consists of coins,
currency in non-bank hands, checkable deposits, and traveler's checks.
The M2 money supply is equal to M1, plus small-time and savings deposits, money market
accounts at banks and other financial institutions, and a few other specialized monetary assets.
13. According to the M1 definition, the money supply consists of currency held by the
public, plus
demand deposits and traveler's checks.
Correct. Demand deposits and traveler's checks are part of M1 monetary aggregate.
14. The M1 money supply includes
checkable deposit accounts.
, Correct. The M1 money supply does includes checkable deposit accounts.
15. Which of the following is included in M2, but not in M1?
Savings deposits
Correct. Savings deposits are included in M2, but not in M1.
16. How does M1 differ from M2?
All the items in M1 are used for transaction purposes, whereas all the items in M2 a are not.
Correct. All the items in M1 are used for transactions purposes, whereas all the items in M2 are not.
17. "Fill in the blank" question: Money is organized into monetary aggregates based on its
liquidity.
Correct. The liquidity of money is determined by the monetary aggregate in which they are included.
18. True or false. M1, which is often referred to as the money supply, consists of coins,
currency in non-bank hands, checkable deposits, and traveler's checks.
True
Correct. M1 is the monetary aggregate with the greatest liquidity.
*Banknotes, Checking Accounts, and Other Forms of Money
19. The U.S. currency that was first issued during the Civil War and not redeemable in
gold was called
greenbacks.
Correct. The U.S. currency issued during the Civil War was called greenbacks.
20. A banknote is
a promise entitling the bearer to an amount of gold on demand at the bank.
Correct. A banknote is a promise entitling the bearer to an amount of gold on demand at the
bank.
21. A function of the early goldsmith was to
provide a storehouse for gold and other metals.
Correct. A goldsmith used to provide a storehouse for gold and other metals.
22. A document that entitles the bearer to an amount of gold on demand at the bank is a
