Question

1Mia puts money into a piggy bank so she can spend it later. What function of money does this illustrate

store of value

medium of exchange

unit of account

None of the above is correct.

2) The primary difference between commodity money and fiat money is that

commodity money is a medium of exchange but fiat money is not.

fiat money is a medium of exchange but commodity money is not.

commodity money has intrinsic value but fiat money does not.

fiat money has intrinsic value but commodity money does not.

3) If the reserve ratio is 5 percent, then a person depositing $500 into a bank can create up to

$10,500 of new money.

$10,000 of new money.

$9,500 of new money.

$2,500 of new money.

4) If the Federal Open Market Committee decides to increase the money supply, then the Federal Reserve

creates dollars and uses them to purchase government bonds from the public.

sells government bonds from its portfolio to the public.

creates dollars and uses them to purchase various types of stocks and bonds from the public.

sells various types of stocks and bonds from its portfolio to the public.

5) During a recession the economy experiences

rising employment and income.

rising employment and falling income

. rising income and falling employment.

falling employment and income.

Answer 1

Ans 1. OPTION A

Store of value gunction of money is the function kf money that it can be used to transfer purchasing power from present period to future period.

Ans 2. OPTION C

Commodity money like gold coins, silver coins etc. has intrinsic value i.e. even if they are not accepted as medium of exchange, still they can be sold in market to recover money.

Fiat money has no intrinsic value. It is acceptable only because fiat money is legal tender and it commands no value in the market other than medium of exchange.

Ans 3. OPTION B

Increase in money supply = 1/Reserve Ratio * Increase in deposits

=> Increase in money supply = 1/0.05 * 500 = $10000

Ans 4. OPTION A

Open market purchase is used by the Federal Reserve to increase money supply. For this Federal Reserve prints money and then purchases treasury bonds from the public increasing money in hands of public which increases the money supply.

Ans 5. OPTION D

During the time of recession, aggregate damand falls leading to a surplus of goods and services in the market which decreases the price level and income in the economy. Due to decrease in aggregate demand, the output level falls which leads to decrease in production causing unemployment.

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