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Worksheet 5 - Answer Key

Worksheet 5 - Answer Key - Introduction to Macroeconomics...

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Introduction to Macroeconomics Econ 104a,c,d,e,f, - Spring 2010 Worksheet 5 – Money, Due in Discussion Thurs 3/11 or Fri 3/12 1. What are the characteristics of Money? (3) Medium of Exchange Store of Value Unit of Account Standard of Deferred Payment 2. What makes up the demand for Money? (3) Demand for Money: three categories Transaction Demand: the amount of money balances indicates desire for purchasing. The only demand recognized by Classical Economists. Precautionary Demand: money to hold to meet unforeseen expenses. Keynes. (Figure 17.1) Speculative Demand: arises from people’s desire to maximize their returns on the funds left over after satisfying their transactions and precautionary demands. Keynes. Related inversely to the interest rate. 3. What is money in the U.S.? There are several categories of “money.” Two categories are M1 and M2. When we talk about money, we usually either mean M1 or M2. M1 includes: Physical currency (cash) circulating in the economy, checking account deposits. (This is the most “liquid” measure of money – because it is money that can be used immediately for payment. M2 includes: Everything that is included under M1, + time deposits, savings deposits, and non- institutional money-market funds. 4. Are Credit Cards Money? Why or why not? No, using a credit card to buy something is not money. Yes, a payment on a credit card could be seen as a standard of deferred payment – it is an asset for future payment. However, it is only money when you send in your payment on your bill. Until you pay your bill it isn’t officially money.
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