Money Supply and the Price Level in Money & Banking Chapter 2

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Questions and Answers

Which of the following is NOT true about the money supply?

Reducing the money supply always leads to positive results. (correct)

A large increase in the money supply can lead to a significant increase in prices.

The Central Bank determines the money supply.

An increase in the money supply can lead to stimulating purchasing power.

What is the main tool used by the monetary authority for directing monetary policy?

Foreign exchange reserves

Interest rates

Money supply (correct)

Stock market

What determines the varying degrees of liquidity of financial assets included in the money supply?

Their maturity period

How easily they can be converted into cash (correct)

Their face value

Their investment potential

Which of the following is true about the measures of money supply?

Measures of money supply differ according to what they contain. Signup and view all the answers

In the United States, how many main measures of money does the Federal Reserve provide?

Two - M1 and M2 Signup and view all the answers

Which central bank provides four measures of money supply as mentioned?

The Bank of England Signup and view all the answers

What is the primary function of M2 as a measure of money supply?

To function as a store of value Signup and view all the answers

What distinguishes time deposits from savings accounts in the banking system?

Time deposits can only be withdrawn after a certain period Signup and view all the answers

Which component is NOT included in M2 but is part of the Broadest Money Supply (M3)?

Commercial paper Signup and view all the answers

What is a characteristic of money market funds that makes them attractive to investors?

High liquidity with minimal credit risk Signup and view all the answers

What penalty might depositors face for withdrawing their time deposits before the due date?

Interest penalty Signup and view all the answers

How do savings accounts function in many societies compared to current accounts?

They are more liquid Signup and view all the answers

What is included in M3 that is different from M2?

Large time deposits Signup and view all the answers

Which of the following is considered part of Quasi Money in Egypt's M2?

Foreign currency time deposits Signup and view all the answers

How is the value of money defined?

As the amount of goods and services that can be purchased with money Signup and view all the answers

What happens to the value of money if the price level doubles?

It halves Signup and view all the answers

Which component is part of M1 but not part of M2?

Demand deposits in local currency Signup and view all the answers

What forms part of Egypt's M2 but not part of M1?

Savings and time deposits in non-bank financial institutions Signup and view all the answers

What assets are included in the Narrowest Money Supply (M1) measure?

Paper money, auxiliary money, deposit money, and traveler’s checks Signup and view all the answers

Which of the following is true about demand deposits?

Banks are obligated to pay the value of the checks immediately for demand deposits. Signup and view all the answers

What represents a highly liquid financial asset based on the text?

Traveler’s checks Signup and view all the answers

In which countries do banknotes usually occupy the first place in relative importance?

Less-developed countries Signup and view all the answers

What is the equation used to calculate the money supply according to the Narrowest Money Supply (M1) measure?

$M1 = banknotes + Demand deposit money + Traveler’s cheques$ Signup and view all the answers

Which type of deposit does not pay any interest according to the text?

Demand deposits Signup and view all the answers

What is the impact of a decrease in prices on the real incomes of employees and retirees?

Their real incomes will improve Signup and view all the answers

How do businessmen with variable incomes typically react to higher prices?

They increase their profits Signup and view all the answers

What happens to the economic position of creditors when the value of money decreases due to rising prices?

Worsens Signup and view all the answers

How does inflation impact savers with financial assets like long-term deposits in banks?

Often face large losses Signup and view all the answers

Why do domestic goods become less competitive in foreign markets when their prices rise?

Export volumes decrease Signup and view all the answers

How does a rise in prices affect the relationship between debtors and creditors?

Improves it Signup and view all the answers

Study Notes

Travelers' checks were replaced by prepaid credit and debit cards in the late 1980s.
M2 is a measure of money supply that includes savings deposits, time deposits, and money market mutual funds in addition to the components of M1.
Savings accounts are now used similarly to current accounts in many societies.
Time deposits are accounts where depositors commit to leaving money in the bank for a specific period in exchange for a higher interest rate.
Money market funds invest in short-term debt securities with minimal credit risk, providing high liquidity with low risk to investors.
M3 is the broadest measure of money supply, including assets like large time deposits, savings in non-bank financial institutions, and government deposits.
Egypt has two measures of Money Supply: M1 includes currency in circulation and demand deposits, while M2 includes M1 and Quasi Money.
The value of money is the purchasing power of currency, with an inverse correlation between the value of money and the level of prices.
Money supply is a key tool for the central bank in directing monetary policy, affecting purchasing power, investment rates, and prices.
Measures of money supply vary in liquidity, with M1 being the narrowest measure based on assets used as a medium of exchange.
M1 includes banknotes, deposit money, and traveler's checks, with demand deposits being highly liquid financial assets.
Changes in the value of money impact income distribution, creditors, debtors, and savers of financial assets.
Changes in the value of money also affect exchange rates and balance of payments, with rising domestic prices decreasing competitiveness in foreign markets.

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Description

Learn about how the money supply impacts the economy and price levels in Money & Banking Chapter 2. Understand the role of the Central Bank in controlling the money supply and its effects on investment rates and inflation.