11 Monetary System

11 Monetary System - Monetary System THE MEANING OF MONEY...

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Unformatted text preview: Monetary System THE MEANING OF MONEY Money is the set of assets in an economy that people regularly use to buy goods and services from other people. The Functions of Money Money has three functions in the economy: Medium of exchange Unit of account Store of value Medium of Exchange A medium of exchange is an item that buyers give to sellers when they want to purchase goods and services. A medium of exchange is anything that is readily acceptable as payment. Unit of Account A unit of account is the yardstick people use to post prices and record debts. Store of Value A store of value is an item that people can use to transfer purchasing power from the present to the future. Liquidity is the ease with which an asset can be converted into the economys medium of exchange. 1. Which of the following is a store of value? a. currency b. U.S. government bonds c. fine art d. All of the above are correct. 2. You get money for babysitting the neighbors' children. This best illustrates which function of money? a. medium of exchange b. unit of account c. store of value d. liquidity 3. Economists use the word "money" to refer to a. income generated by the production of goods and services. b. those assets regularly used to buy goods and services. c. the value of a person's assets. d. the value of stocks and bonds. 4. Which list ranks assets from most to least liquid? a. currency, fine art, stocks b. currency, stocks, fine art c. fine art, currency, stocks d. fine art, stocks, currency 1 The Kinds of Money Commodity money takes the form of a commodity with intrinsic value. Examples: Gold, silver, cigarettes. Fiat money is used as money because of government decree. It does not have intrinsic value. Examples: Coins, currency, check deposits. 5. Current U.S. currency is a. fiat money with intrinsic value. b. fiat money with no intrinsic value. c. commodity money with intrinsic value. d. commodity money with no intrinsic value. Money in the U.S. Economy Currency is the paper bills and coins in the hands of the public. Demand deposits are balances in bank accounts that depositors can access on demand by writing a check. Figure 1 Two Measures of the Money Stock for the U.S. Economy 6. M1 includes a. currency. b. demand deposits. c. travelers' checks. d. All of the above are correct. 7. Which of the following is included in M2 but not in M1? a. currency b. demand deposits c. savings deposits Billions of Dollars Currency ($699 billion) Demand deposits Traveler s checks Other checkable deposits ($664 billion) Everything in M1 ($1,363 billion) Savings deposits Small time deposits Money market mutual funds A few minor categories ($5,035 billion) M1 $1,363 M2 $6,398 2 d. All of the above are included in both M1 and M2 8. Credit cards a. defer payments....
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This note was uploaded on 07/22/2009 for the course ECON 203 taught by Professor Nelson during the Fall '08 term at Texas A&M.

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11 Monetary System - Monetary System THE MEANING OF MONEY...

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