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The Role of Money: Summary

Money is used as a medium of exchange.

We exchange money for the goods and services that we are provided with. This the most important function of money as it is  a medium to facilitate transactions. When one cannot use money to buy anything it becomes worthless when there is more money in an economy this means that the prices of goods and services will be high.

Store of value

Money is the most liquid asset. some countries prefer to use gold as money or any material like silver that is limited in supply like silver mostly gold is the most commonly used as its supply is limited, gold earns no interest whereas money in the bank does but despite  many countries still use gold as their national currencies.

Money can also be stored for some period of time and still remain valuable in exchange fear of inflation has also led to the rise in the prices of gold. Inflation means that there is an increase in the amount of money but there is no corresponding rise in the supply of goods causing a price increase.

The national economy uses money to transfer wealth and give people incentives to produce wealth as it does not recognize money as wealth. The people given the money can invest in private sector.

Money is also used as a unit of account.

Money is also used to measure the relative worth of goods and services. The higher the price of a good or a service the higher the worth. The  money value for goods and services that are produced in a economy in an accounting yar is called the gross domestic product.

Money is also a measure of value-money acts as a denominator because it permits everything to be priced including goods and services.

Standard of differed payment-this is the expressing the value of a debt.



the exchange of a good or service for another good or service

checkbook money

that portion of the money supply represented by checkable deposits


one of the two kinds of currency in circulation in the US; also known as “fractional currency” as well as token money


that part of the money supply consisting of paper money and coins

fiat money

money that has value because the government says it does, not because of its natural value

legal tender

a currency that by law must be accepted in payment of debt

medium of exchange

something readily accepted in payment for goods and services

paper currency

one of the two kinds of currency in the US; makes up about 46% of the money supply

standard of value

it allows us to express the value of different items

store of value

since money can be saved for future use, it provides a means or storing value

Stocks and bonds
are examples of stores of value, but not units of account nor medium of exchange.

You sell your old smartphone online for cash. The fact that you accept cash for your old smartphone best illustrates which function of money?
medium of exchange

True or false: Since money is the most liquid asset, most people seek to allocate all of their wealth towards currency.

Which of the following assets is most liquid?

Which of the following most closely fits an economist’s definition of “money”?
the set of assets in an economy that people regularly use to buy goods and services.

Which of the following best defines commodity money?
money that takes the form of a commodity with intrinsic value.

Which of the following is not an example of currency?
a $1,000 balance stored in a checking account.

Which of the following is not included in M1?
money market mutual funds

Which of the following lists all items included in M2 but not in M1?
savings deposits, small time deposits, money market mutual funds and other minor categories

Which type of money has no intrinsic value?
fiat money

The New York Federal Reserve Bank
president always gets to vote at the FOMC meetings.

Ben Bernanke was
reappointed Chair of the Board of Governors in 2009 by President Barack Obama.

Which of the following does the Federal Reserve do?
act as a lender of last resort to banks

Central banks are institutions
designed to oversee the banking system and regulate the quantity of money in the economy

Which of the following is not true regarding the Federal Reserve?
the Fed was created to facilitate the federal government’s collection of taxes as well as its expenditures.

In order to ensure banks can pay back depositors, Bank regulators impose
capital requirements.

Under what system do banks generally lend out the majority of the funds deposited?
Fractional reserve banking.

As the reserve ratio increases, the money multiplier

Bank assets divided by bank capital is known as
the leverage ratio

Suppose the money multiplier has increased. Which of the following is the most likely cause?
the reserve ratio decreases

Which of the following decrease when the Fed makes open market purchases?
neither currency nor reserves

The Fed has decreased the money supply through open market operations. Which of the following has occurred?
open market sales, and bank reserves decrease.

Suppose the Fed wishes to decrease the money supply, which of the following open market operations will the Fed conduct to accomplish this goal?
Sells bonds to the public.

The Fed conducts open market operations that cause bank withdrawals and lending to decrease. The Fed has
conducted open market sales.

When the Fed sells U.S. government bonds, it has conducted
open market sales, which decrease the money supply.

Which of the following will make banks want to hold more reserves at the Fed, causing the money multiplier to decrease?
The Fed increases the interest rate on bank deposits held at the Fed.

The less money households deposit, the less reserves banks have, and the more money the banking system can then create.

True or False: When the Fed sells government bonds the money supply increases and the federal funds rate decreases.

To decrease the money supply the Fed can conduct open-market sales. Alternatively, the Fed can
increase the discount rate.

All else equal, which of the following will cause the money supply to fall?
banks decide to hold more excess reserves relative to deposits.

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