1. List and describe the four functions of money 2. Calculate M1 and M2 using de
ID: 1103129 • Letter: 1
Question
1. List and describe the four functions of money
2. Calculate M1 and M2 using details from the table given below.
Value (in millions)
Currency
$75
Checkable deposits
90
Traveler's checks
30
Savings deposits
125
Small-denomination time deposits
175
Non-institutional money market mutual fund shares
50
Money market deposit accounts
25
3. List and explain the main functions of a Central Bank.
4. In an essay, no less than 300 words, describe how banks can create money.
Value (in millions)
Currency
$75
Checkable deposits
90
Traveler's checks
30
Savings deposits
125
Small-denomination time deposits
175
Non-institutional money market mutual fund shares
50
Money market deposit accounts
25
Explanation / Answer
1) The functions of money are
i) Medium of exchange- It means that money acts as a medium for the sale and purchase of goods and services. In the absence of money, goods were exchanged for goods. This required double coincidence of wants. Accordingly exchange was difficult and thus limited. Money has separated the act of sale and purchase making double coincidence of want not required any longer. Exchange is simplified and unlimited. This has raised the overall economic activity in an economy.
ii) Measure of value- Money serves as a measure of value in terms of unit of account. It means that the value of each good or service is measured in the monetary unit. In barter system there was no common unit of value. Introduction of money has reduced this difficulty. Now each good is valued in terms of money. Thus accounting has become simple and easy.
iii) Standard of deferred payment- Deferred payment refers to those payments which are made sometimes in the future. Example- payment of loans. Money has made deferred payment much easier than before. When we borrow money one needs to return both principal and interest. It is difficult to transact in terms of goods and services. Money performs this function most effectively.
iv) Store of value- Store of value implies store of wealth. Storing wealth has become considerably easy with the introduction of money. Stored wealth is a source for future investment. It was not convenient to store value in the barter system of exchange, because goods tend to wear out or perish. On the other hand it is convenient to store value in terms of money because money has the merit of general acceptability, the value of money remains stable compared to other commodities and storage of money doesnot need much space. Store of value is also called asset function of money.
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