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Money and Fed Questions.docx - Macroeconomics Mr Kendrick 1...

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Macroeconomics – Mr. Kendrick Chapter 16 Questions and Problems 1. What are the three basic functions of money? a. Medium of Exchange i. Accepted as payment for goods and services b. Store of Value i. Able to be held for future purchases c. Unit of Account i. A price mechanism ii. To compare the value of goods and services 2. Why is it important for the Fed to know the size and rate of growth of the money supply? What are the effects if the MS growth is “too slow” or “too rapid”? a. Fed must monitor MS growth since it directly impacts the macro-equilibrium AD and SRAS b. Changes in the size of the money supply and the rate in which it is growing can have significant impact on fluctuations of output and the health or well-being of an economy c. Uncertainty creates difficult decision making for firms i. When effects grow “too slow” or “too rapid” 1. Slow: Recessionary Gap High unemployment 2. Rapid: Inflationary Gap High inflation 3. Name a type of money that serves primarily as a medium of exchange. a. Currency + coin b. Travelers Checks c. Checkable deposits (debit cards) d. M1 ($3.5 Trillion) 4. Name a type of money that serves primarily as a store of value. a. Savings Account b. Money Market Accounts c. CD d. M2 5. Credit cards are one of the most commonly used methods of payment. However, they are excluded from the money supply.
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