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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鈥檛 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?

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Why are federal prosecutors reluctant to bring major charges against large financial firms? What was the main regulatory action of the Glass-Steagall law? Why might having many smaller financial firms be more stable than having fewer larger firms? What argument can be made for the possibility that larger financial firms might be more stable than smaller financial firms?

Assume that securitization combined with borrowing and irrational exuberance in Hyperville have driven up the value of asset-backed financial securities at a geometric rate, specifically from \(2 to \)4 to \(8 to \)16 to \(32 to \)64 over a 6-year time period. Over the same period, the value of the assets underlying the securities rose at an arithmetic rate from \(2 to \)3 to \(4 to \)5 to \(6 to \)7. If these patterns hold for decreases as well as for increases, by how much would the value of the financial securities decline if the value of the underlying asset suddenly and unexpectedly fell by $5?

What are the three basic functions of money? Describe how rapid inflation can undermine money鈥檚 ability to perform each of the three functions.
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