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Economics: Functions of Money

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Questions and Answers

What is M1 composed of?

Money market mutual funds and CDs

Currency and small denomination time deposits

Retail money market funds and credit cards

Currency and checkable deposits (correct)

Why are credit card purchases not included in the money supply?

Because they are not a store of value

Because they are a type of loan

Because they are not a medium of exchange

Because they involve borrowed funds (correct)

What is the role of banks in the macroeconomy?

To provide a way for savers to supply their funds to borrowers

To make a profit without taking risks

To create a loanable funds market

To serve as financial intermediaries and create the supply of money (correct)

What is the difference between assets and reserves on a bank's balance sheet?

Assets are items a firm owns, while reserves are a portion of deposits set aside Signup and view all the answers

How can banks be profitable?

By charging higher interest rates on loans than they pay on deposits Signup and view all the answers

What do banks do with the deposits they receive?

They extend loans to households and firms Signup and view all the answers

What is the function of money that enables people to compare the prices of different goods and services?

Unit of account Signup and view all the answers

What type of money has no inherent value except as a medium of exchange?

Fiat money Signup and view all the answers

What is the term for the trade of a good or service in the absence of a commonly accepted medium of exchange?

Barter Signup and view all the answers

What is the term for a situation in which each party in an exchange transaction happens to have what the other party desires?

Double coincidence Signup and view all the answers

What type of money involves the use of an actual good for money, and the good itself has value apart from its function as money?

Commodity money Signup and view all the answers

What does the Federal Reserve closely monitor to measure the quantity of money in the economy?

Interest rates Signup and view all the answers