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Chapter 14: Q1. (page 301)

The three functions of money are:

a. liquidity, store of value, and gifting.

b. medium of exchange, unit of account, and liquidity.

c. liquidity, unit of account, and gifting.

d. medium of exchange, unit of account, and store of value.

Short Answer

Expert verified

The correct answer is option d) medium of exchange, unit of account, and store of value.

Step by step solution

01

Step 1. Explanation for the correct option (d) 

The reasons for the correct option are:

  • Money is a medium of exchange asit is used to make purchasesand buy the goods and services one needs.

  • Money also serves as a unit of accountas it is used to measure the relative value of goods and services available in society.

Money as a store of value helps people to save it for future needs. Money is easy to store and does not deteriorate over time. It can be used to make transactions in future as well.

02

Step 2. Explanation for the incorrect options

Liquidity refers to how simply an asset can be converted into money. Liquidity is one of the key advantages of money, and it can’t be considered a function of money. Gifting is also a feature of money, so options a, b, and c are incorrect.

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Most popular questions from this chapter

Assume that the following asset values (in millions of dollars) exist in Ironmania: Federal Reserve Notes in circulation = \(700; Money market mutual funds (MMMFs) held by individuals = \)400; Corporate bonds = \(300; Iron ore deposits = \)50; Currency in commercial banks = \(100; Savings deposits, including money market deposit accounts (MMDAs) = \)140; Checkable deposits = \(1,500; Small-denominated (less than \)100,000) time deposits = \(100; Coins in circulation = \)40.

a. What is M1 in Ironmania?

b. What is M2 in Ironmania?

Assume that Jimmy Cash has \(2,000 in his checking account at Folsom Bank and uses his checking account debit card to withdraw \)200 of cash from the bank’s ATM machine. By what dollar amount did the M1 money supply change as a result of this single, isolated transaction?

Which two of the following financial institutions offer checkable deposits included within the M1 money supply: mutual fund companies; insurance companies; commercial banks; securities firms; thrift institutions? Which of the following items is not included in either M1 or M2: currency held by the public; checkable deposits; money market mutual fund balances; small-denominated (less than $100,000) time deposits; currency held by banks; savings deposits?

Why do economists nearly uniformly support an independent Fed rather than one beholden directly to either the president or Congress?

An important reason why members of the Federal Reserve’s Board of Governors are each given extremely long, 14-year terms is to:

a. insulate members from political pressures that could result in inflation.

b. help older members avoid job searches before retiring.

c. attract younger people with lots of time left in their careers.

d. avoid the trouble of constantly having to deal with new members
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