Question

1. What money is money?
2. Why it is necessary to have money?
3. Among the two types of money, which money is more important? Why?
4. List two functions of Central Bank?
5. List two ways the Central Bank of Kuwait can control money supply?

Answer 1

Q) Money is a legal tender(currency, demand deposits etc) which facilitates exchange ie it is used as a payment for goods and services, repayment of debt and all other economic transactions can be done through money.

Q) It is necessary to have money for daily transactions. It can be used to purchase goods and services. Sellers can use it to buy raw materials for production.It facilitates exchange between different economic agents.

Q) The two types of money are commodity money and fiat money. The value of Commodity money is derived from the commodity of which it is made. Eg- gold, silver etc

Fiat money is the money which does not have intrinsic value. It is a legal tender by government decree. Eg- paper currency.

Fiat money is more useful in transactions. Commodity money cannot be easily converted to liquid form. Thus for day to day transactions fiat currency plays an important role.

Q) Two functions of central bank : Issues currency and regulates commercial banks.

Q) Central bank of kuwait can control money supply by buying and selling government bonds in the open market. It can alternate the policy rate at which commercial banks lend to public. Thus this way supply of money can be controlled.