money supply by selling more government bonds. Explain in each case how the change you advocate would affect (1) commercial bank reserves, (2) the money supply, (3) interest rates,and (4) aggregate demand. (1) Commercial bank reserves will increase, since less money will be in circulation. (2) The money supply should contract (tighten). (3) Interest rates will increase, leading to an increase in investments (keeping money out of circulation and leading to a decrease in inflation rates). (4) Aggregate demand would decrease, which should lead to a decrease in inflation.
Question 34.What are the three basic functions of money? Describe how rapid inflation can undermine money’s ability to perform each of the three functions.Student Answer:Money serves as a medium of exchange, as a store of value, and as a unit of account. Medium of exchange; Money's most important function is as a medium of exchange to facilitate transactions. Without money, all transactions would have to be conducted by barter,which involves direct exchange of one good or service for another. The difficulty with a barter system is that in order to obtain a particular good or service from a supplier, one has to possess a good or service of equal value, which the supplier also desires. Store of value; In order to be a medium of exchange, money must hold its value over time; that is, it must