16.Money: Fiat money is money created by rule and NOT backed by a commodity. Com
ID: 1124059 • Letter: 1
Question
16.Money:
Fiat money is money created by rule and NOT backed by a commodity. Commodity money has intrinsic value, it has value unrelated to its use as money.
Please answer what types of money they are:
(i) U.S. dollar bill
(ii) gold coins
17.Functions of money:
The three main functions of money are:
Money as a medium of exchange: We say that money is a medium of exchange because it represents something you can use to purchase goods and services.
Money as a unit of account: We say that money is a unit of account because it represents a standard unit of comparison or measure.
Money as a store of value: Money can provide a means of saving or ‘storing’ things of value in an efficient manner in terms of money.
Please answer:
What type of function of money are we talking about when we say U.S. GDP is $19 trillions?
18.Money Multiplier:
Banks create money in the economy by loaning out part of each deposit, which will be redeposited by someone else. Banks do not loan out all the deposit. They have to set aside a certain fraction of the deposit and not loan it out. This ratio of the total amount of demand deposits at a bank to the amount kept as cash reserves is known as the reserve ratio. The rest of the reserve (called excess reserve) is what banks can loan out and earn interest income.
The money multiplier measures the potential amount of money that the banking system generates with each dollar of reserves.
The formula says, total money creation = initial deposit X money multiplier
Where,
money multiplier = 1/reserve ratio
Say, Initial deposit was: $100 and reserve ratio was 10%.
Please calculate:
If the reserve ratio is 10 percent, then the money multiplier =
If the reserve ratio is 5 percent, then the money multiplier =
19.Crowding out is reduction in private borrowing that is caused by an increase in government borrowing.
Please answer what happens in the interest rate if governemnt runs a budget deficit and borrows from the loanable fund market?
20. Different assets are of different liquidity. For example, gold is considered as a more liquid asset than the real estate. Please answer what liquidity means.
Explanation / Answer
16. (i) US dollar bill is a fiat money. Fiat money is a legal tender issued by a state agency (mainly the central bank) and backed by the government. US dollar bill is a legal tender the value of which is backed by the US government. Similarly, the euro or the yen is fiat money.
(ii) A gold coin is a commodity money. A commodity money is a type of money the value of which depends on the value of the commodity of which the money is made. The value of the gold coin is equal to the market value of the amount of gold contained in the coin. So, a gold coin is a commodity money.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.