Chapter 2

Question 0

3 functions of money

Answer 0

1. Means of payment (medium of exchange)
2. Store of value, when people hold onto it (imperfect b/c of inflation)
3. Unit of account (all prices are denominated in $ money)

Question 1

Broad definition of money

Answer 1

Money is that which is generally accepted as a means of payment.

Question 2

**M1 and definition

Answer 2

M1 refers to the most liquid of all assets: (Currency + DD)
Currency outside banks plus demand deposits.
(currency, demand deposits, other checkable deposits and traveler’s checks) Fed does not control traveler’s checks

Question 3

Velocity

Answer 3

The rate of turnover of the money supply; the average number of times per year each dollar is used to purchase goods and services (often measured as GDP divided by the money supply).
MV=PQ, so V = PQ/M (P=price, Q=output, M=money V=velocity)