Question

1. MONEY, MONETARY AGGREGATES AND INFLATION a. What are the four functions of money? Explain each briefly b. What is included in MI? In M2? c. What is the most common form of money used by Americans? d. Write the equation that represent the Quantity Theory of Money. c. According to the quantity theory of money, if the cconomy is operating at full employment what happens when the money supply increases? e. Suppose the Fed want the rate of inflation to be 2.5%. The rate of growth of output is 1.5%. What should the Fed set as the growth rate of the money supply?

Answer 1

Part A

Money is a general object that can be used to accept and payment for goods and services. The four functions of money include,

The medium of exchange

Money fills in as a medium of exchange for a wide range of goods and services. money encourages both purchasing and selling of goods and services. The present current economy—in light of specialization and division of work—can't be envisioned without a generally acceptable medium of exchange.

Measure of value

Money goes about as a unit of account or money is the proportion of exchange value. This implies money is a kind of common denominator, through which the exchange value all goods and services can be communicated with no trouble. Incalculable exchange rates under the barter framework prior raised a tremendous ruckus in the exchanges of all kinds.

Store of value

Money additionally fills in as a store of value. It is a 'repository of purchasing power over time'. A store of value i.e., money is utilized to spare purchasing power from the time income is gotten until the time it is spent. money is one such medium in which one wishes to hold wealth. money is in this way a method for saving.

Standard of deferred payments

Lending and borrowing for all intents and purposes come to stop in a cashless economy. With the presentation of money, borrowing and lending have gotten simpler. With the extension of trade and commerce dependent using a loan, money has gotten a standard of deferred payments. Deferred payments are those which are deferred for future. money empowers current exchanges to be released in future.

Part B

The M1 supply of money includes cash, demand deposit, and travellers check. The M2 includes M1 and saving and time deposits, certificate of deposits and money market funds. The M1 is considered as the most liquid and M2 is less liquid assets.

Part C

Paper money. The paper money is a paper currency that is generally accepted as a medium of exchange for goods and services.

Part D

The quantity theory of money states that the money supply and price level in an economy are in direct proportional. The equation for quantity theory of money is,

MV=PT

Where,M—Money supply, V—Velocity of circulation of money, P—Price level and T-Total volume of transactions.