UNIT 1: WHAT IS MONEY?

Objectives
At the end of this lesson students will be able to:
✓ Identify the functions of money
✓ Explain characteristics of money
✓ List types of money and their features
✓ Define what money supply is and name subdivisions

The use of money spans a very large part of our everyday life. Look around you and you would easily
be able to identify several transactions involving money in any single day. Can you make a list of these?
In many of these transactions, goods are being bought and sold with the use of money. In some of these
transactions, services are being exchanged with money. For some, there might not be any actual transfer
of money taking place now but a promise to pay money later. Have you ever wondered why transactions
are made in money? The reason is simple.
A person holding money can easily exchange it for any commodity or service that he or she might
want. Thus, everyone prefers to receive payments in money and then exchange the money for things
that they want. Both parties have to agree to sell and buy each other’s commodities. This is known as
double coincidence of wants. What a person desires to sell is exactly what the other wishes to buy. In
a barter system where goods are directly exchanged without the use of money, double coincidence of
wants is an essential feature. In contrast, in an economy where money is in use, money by providing
the crucial intermediate step eliminates the need for double coincidence of wants.
Meaning of Money
As the word money is used in everyday conversation, it can
mean many things, but to economists, it has a very specific
meaning. To avoid confusion, we must clarify how
economists’ use of the word money differs from
conventional usage.
Economists define money (also referred to as the money
supply) as anything that is generally accepted in payment for
goods or services or in the repayment of debts. Currency,
consisting of dollar bills and coins, clearly fits this definition
and is one type of money. When most people talk about

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money, they’re talking about currency (paper money and coins). If, for example, someone comes up to
you and says, “Your money or your life,” you should quickly hand over all your currency rather than
ask, “What exactly do you mean by ‘money’?”
To define money merely as currency is much too narrow for economists. Because checks are also
accepted as payment for purchases, checking account deposits are considered money as well. An even
broader definition of money is often needed, because other items such as savings deposits can in effect
function as money if they can be quickly and easily converted into currency or checking account
deposits. As you can see, there is no single, precise definition of money or the money supply, even for
economists.
To complicate matters further, the word money is frequently used synonymously with wealth. When
people say, “Joe is rich—he has an awful lot of money,” they probably mean that Joe has not only a lot
of currency and a high balance in his checking account but has also stocks, bonds, four cars, three
houses, and a yacht. Thus while “currency” is too narrow a definition of money, this other popular
usage is much too broad. Economists make a distinction between money in the form of currency,
demand deposits, and other items that are used to make purchases and wealth, the total collection of
pieces of property that serve to store value. Wealth includes not only money but also other assets such
as bonds, common stock, art, land, furniture, cars, and houses.
People also use the word money to describe what economists call income, as in the sentence “Sheila
would be a wonderful catch; she has a good job and earns a lot of money.” Income is a flow of earnings
per unit of time. Money, by contrast, is a stock: It is a certain amount at a given point in time. If someone
tells you that he has an income of $1,000, you cannot tell whether he earned a lot or a little without
knowing whether this $1,000 is earned per year, per month, or even per day. But if someone tells you
that she has $1,000 in her pocket, you know exactly how much this is.
Keep in mind that the money discussed in this book refers to anything that is generally accepted in
payment for goods and services or in the repayment of debts and is distinct from income and wealth.
Functions of Money
Money can be any substance that serves as a medium of exchange, a measure of value, a store of value
and a standard of deferred payment. If it satisfies these three functions, it will be accepted and used by
everyone in a society
Medium of Exchange
Whether money is shells or rocks or gold or paper, it has three primary functions in any economy: as a
medium of exchange, as a unit of account, and as a store of value. Of the three functions, its function
as a medium of exchange is what distinguishes money from other assets such as stocks, bonds, and

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houses. In almost all market transactions in our economy, money in the form of currency or checks is
a medium of exchange; it is used to pay for goods and services. The use of money as a medium of
exchange promotes economic efficiency by minimizing the time spent in exchanging goods and
services. To see why, let’s look at a barter economy, one without money, in which goods and services
are exchanged directly for other goods and services.
Take the case of Ellen the Economics Professor, who can do just
one thing well: give brilliant economics lectures. In a barter
economy, if Ellen wants to eat, she must find a farmer who not
only produces the food she likes but also wants to learn economics.
As you might expect, this search will be difficult and time-
consuming, and Ellen might spend more time looking for such an
economics-hungry farmer than she will teaching. It is even
possible that she will have to quit lecturing and go into farming
herself. Even so, she may still starve to death. The time spent
trying to exchange goods or services is called a transaction cost. In a barter economy, transaction costs
are high because people have to satisfy a “double coincidence of wants”- they have to find someone
who has a good or service they want and who also wants the good or service they have to offer.
Unit of Account
The second role of money is to provide a unit of account; that is, it is used to measure value in the
economy. We measure the value of goods and services in terms of money, just as we measure weight
in terms of pounds or distance in terms of miles. To see why this function is important, let’s look again
at a barter economy where money does not perform this function. If the economy has only three
goods—say, peaches, economics lectures, and movies—then we need to know only three prices to tell
us how to exchange one for another: the price of peaches in terms of economics lectures (that is, how
many economics lectures you have to pay for a peach), the price of peaches in terms of movies, and
the price of economics lectures in terms of movies. If there were ten goods, we would need to know 45
prices in order to exchange one good for another; with 100 goods, we would need 4,950 prices; and
with 1,000 goods, 499,500 prices
We can see that using money as a unit of account reduces transaction costs in an economy by reducing
the number of prices that need to be considered. The benefits of this function of money grow as the
economy becomes more complex.
Store of Value

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Money also functions as a store of value; it is a repository of purchasing power over time. A store of
value is used to save purchasing power from the time income is received until the time it is spent. This
function of money is useful, because most of us do not want to spend our income immediately upon
receiving it, but rather prefer to wait until we have the time or the desire to shop.
Money is not unique as a store of value; any asset—whether money, stocks, bonds, land, houses, art,
or jewelry—can be used to store wealth. Many such assets have advantages over money as a store of
value: They often pay the owner a higher interest rate than money, experience price appreciation, and
deliver services such as providing a roof over one’s head. If these assets are a more desirable store of
value than money, why do people hold money at all?
The answer to this question relates to the important economic concept of liquidity, the relative ease and
speed with which an asset can be converted into a medium of exchange. Liquidity is highly desirable.
Money is the most liquid asset of all because it is the medium of exchange; it does not have to be
converted into anything else in order to make purchases. Other assets involve transaction costs when
they are converted into money. When you sell your house, for example, you have to pay a brokerage
commission (usually 5% to 7% of the sales price), and if you need cash immediately to pay some
pressing bills, you might have to settle for a lower price in order to sell the house quickly. Because
money is the most liquid asset, people are willing to hold it even if it is not the most attractive store of
value.
Standard of Deferred Payment
To the extent that money is accepted as a medium of exchange and serves as a useful store of value, it
can be used to transfer value over different time periods in the form of credits and debts.
One person can borrow a quantity of money from someone else for an agreed-upon period of time, and
repay a different agreed-upon quantity of money at a future date.
Characteristics of Money
In order to be most useful, money should be fungible, durable, portable, recognizable, and stable. These
properties reduce the transaction cost of using money by making it easy to exchange.
Money Should Be Fungible
The word fungible refers to a quality that allows one thing to be exchanged, substituted, or returned for
another thing, under the assumption of equivalent value. Thus, units of money should be
interchangeable with one another.
For example, metal coins should have a standard weight and purity. Commodity money should be
relatively uniform in quality. Trying to use a non-fungible good as money results in transaction costs
that involve individually evaluating each unit of the good before an exchange can take place.

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Money Should Be Durable
Money should be durable enough to retain its usefulness for many, future exchanges. A perishable good
or a good that degrades quickly due to various exchanges will be less useful for future transactions.
Trying to use a non-durable good as money conflicts with money's essential future-oriented use and
value.
Money should be divisible
Money should be easily divisible into smaller units, so that
people can use only as much as needed for any transaction. Most
early money was highly divisible. In the case of the Masai’s iron
spear currency, the necklace was untied and some of the spears
removed. The blocks of tea or cheese were cut with a knife.
Bundles of tobacco leaves were broken apart.
Money Should Be Portable
Money should be easy to carry and divide so that a worthwhile quantity can be carried on one's person
or transported. For example, trying to use a good that's difficult or inconvenient to carry as money
could require physical transportation that results in transaction costs.
Money Should Be Recognizable
The authenticity and quantity of the good should be readily apparent to users so that they can easily
agree to the terms of an exchange. Using a non-recognizable good as money can result in transaction
costs relating to authenticating the goods and agreeing on the quantity needed for an exchange.
Money's Supply Should Be Stable
The supply of the item used as money should be relatively constant over time to prevent fluctuations
in value. Using a non-stable good as money produces transaction costs due to the risk that its value
might rise or fall, because of scarcity or over-abundance, before the next transaction.
Evolution of the Payments System
We can obtain a better picture of the functions of money and the forms it has taken over time by looking
at the evolution of the payments system, the method of conducting transactions in the economy. The
payments system has been evolving over centuries, and with it the form of money. At one point,
precious metals such as gold were used as the principal means of payment and were the main form of
money. Later, paper assets such as checks and currency began to be used in the payments system and
viewed as money. Where the payments system is heading has an important bearing on how money will
be defined in the future.
Commodity Money

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To obtain perspective on where the payments system is heading, it is worth exploring how it has
evolved. For any object to function as money, it must be universally acceptable; everyone must be
willing to take it in payment for goods and services. An object that clearly has value to everyone is a
likely candidate to serve as money, and a natural choice is a precious metal such as gold or silver.
Money made up of precious metals or another valuable commodity is called commodity money, and
from ancient times until several hundred years ago, commodity money functioned as the medium of
exchange in all but the most primitive societies. The problem with a payments system based exclusively
on precious metals is that such a form of money is very heavy and is hard to transport from one place
to another. Imagine the holes you’d wear in your pockets if you had to buy things only with coins!
Indeed, for large purchases such as a house, you’d have to rent a truck to transport the money payment.
Fiat Money
The next development in the payments system was paper currency (pieces of paper that function as a
medium of exchange). Initially, paper currency carried a guarantee that it was convertible into coins or
into a quantity of precious metal. However, currency has evolved into fiat money, paper currency
decreed by governments as legal tender (meaning that legally it must be accepted as payment for debts)
but not convertible into coins or precious metal. Paper currency has the advantage of being much lighter
than coins or precious metal, but it can be accepted as a medium of exchange only if there is some trust
in the authorities who issue it and if printing has reached a sufficiently advanced stage that
counterfeiting is extremely difficult. Because paper currency has evolved into a legal arrangement,
countries can change the currency that they use at will.
Major drawbacks of paper currency and coins are that they are easily stolen and can be expensive to
transport in large amounts because of their bulk. To combat this problem, another step in the evolution
of the payments system occurred with the development of modern banking: the invention of checks.
Checks
A check is an instruction from you to your bank to transfer
money from your account to someone else’s account when
she deposits the check. Checks allow transactions to take
place without the need to carry around large amounts of
currency. The introduction of checks was a major innovation
that improved the efficiency of the payments system.
Frequently, payments made back and forth cancel each other; without checks, this would involve the
movement of a lot of currency. With checks, payments that cancel each other can be settled by
canceling the checks, and no currency need be moved. The use of checks thus reduces the transportation

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costs associated with the payments system and improves economic efficiency. Another advantage of
checks is that they can be written for any amount up to the balance in the account, making transactions
for large amounts much easier. Checks are also advantageous in that loss from theft is greatly reduced,
and because they provide convenient receipts for purchases.
There are, however, two problems with a payments system based on checks. First, it takes time to get
checks from one place to another, a particularly serious problem if you are paying someone in a
different location who needs to be paid quickly. In addition, if you have a checking account, you know
that it usually takes several business days before a bank will allow you to make use of the funds from
a check you have deposited. If your need for cash is urgent, this feature of paying by check can be
frustrating. Second, all the paper shuffling required to process checks is costly; it is estimated that it
currently costs over $10 billion per year to process all the checks written in the United States.
Electronic Payment
The development of inexpensive computers and the spread of the Internet now make it cheap to pay
bills electronically. In the past, you had to pay your bills by mailing a check, but now banks provide a
web site in which you just log on, make a few clicks, and thereby transmit your payment electronically.
Not only do you save the cost of the stamp, but paying bills becomes (almost) a pleasure, requiring
little effort. Electronic payment systems provided by banks now even spare you the step of logging on
to pay the bill. Instead, recurring bills can be automatically deducted from your bank account.
Estimated cost savings when a bill is paid electronically rather than by a check exceed one dollar.
E-Money
Electronic payments technology can not only substitute for
checks, but can substitute for cash, as well, in the form of
electronic money (or e-money), money that exists only in
electronic form. The first form of e-money was the debit card.
Debit cards, which look like credit cards, enable consumers to
purchase goods and services by electronically transferring funds
directly from their bank accounts to a merchant’s account. Debit
cards are used in many of the same places that accept credit cards
and are now often becoming faster to use than cash.
At most supermarkets, for example, you can swipe your debit card through the card reader at the
checkout station, press a button, and the amount of your purchases is deducted from your bank account.
Most banks and companies such as Visa and MasterCard issue debit cards, and your ATM card
typically can function as a debit card.

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 A more advanced form of e-money is the stored-value card. The simplest form of stored-value card is
purchased for a preset dollar amount that the consumer pays up front, like a prepaid phone card. The
more sophisticated stored-value card is known as a smart card. It contains a computer chip that allows
it to be loaded with digital cash from the owner’s bank account whenever needed. Smart cards can be
loaded from ATM machines, personal computers with a smart card reader, or specially equipped
telephones.
A third form of electronic money is often referred to as e-cash, which is used on the Internet to purchase
goods or services. A consumer gets e-cash by setting up an account with a bank that has links to the
Internet and then has the e-cash transferred to her PC. When she wants to buy something with e-cash,
she surfs to a store on the Web and clicks the “buy” option for a particular item, whereupon the e-cash
is automatically transferred from her computer to the merchant’s computer. The merchant can then
have the funds transferred from the consumer’s bank account to his before the goods are shipped.
Given the convenience of e-money, you might think that we would move quickly to the cashless society
in which all payments were made electronically.
CHECKING FOR UNDERSTANDING

I. A. Match the correct terms with the correct definitions

1. Money A. refers to a physical item, that possesses intrinsic value.
2. Fiat money B. is a function of money indicating that the asset used for money
retains its value and can be used at a later time.
3. Commodity money C. expedites trade between a buyer and seller because it is widely
accepted as payment for a good or service
4. Measure of value D. is anything that is widely accepted as a means of payment for
a good or service
5. Medium of exchange E. is a written, dated, and signed draft that contains an order
directing a bank to pay a definite sum of money to a payee.
6. Barter F. is the money that can be officially used in a country
7. Store of value G. is a government-issued currency that is not backed by a
physical commodity
8. Legal tender H. is the exchanging of one good or service for another without
using money
9. A check I. is the function of being a widely accepted way to value a debt.
10. Standard of deferred payment J. is the function of money that enables the values of different
goods and services to be compared,

DGAJCHBFEI
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B. Choose the correct answers to the following questions
11. Barter cannot function well
A. because goods are not always divisible. C. because goods are always standardized.
B. because transaction costs are minimal. D. because there is no market
12. Which of the following applies to money when it serves as a store of value?
I Money is a store of value because it is an agreed measure for stating goods' prices.
II The more stable money's value, the better it serves as a store of value.
III When money serves as a store of value, it requires a double coincidence of wants.
A. I only B. II only C. II and III D. I and II
13. The functions of money are …..
A. medium of exchange, unit of account, and store of value.
B. pricing, contracts, and means of payment.
C. medium of exchange and the ability to buy goods and services.
D. medium of exchange, unit of account, and means of payment
14. Paper currency is known as ‘fiat money’ …..
A. because only a fraction of total currency is C. because it cannot be used as payment for
in coins. debts.
B. because it is decreed legal tender. D. because it is easily torn.
15. An example of money as a unit of account is …
A. prices on amazon.co.uk being in British pounds C. holding British stocks
B. paying for dinner in London with pounds D. flying on British Airways
16. A person’s house is part of her ……
A. money. C. wealth.
B. income. D. all of the above.
17. Among four functions, the one that distinguishes money from other assets is its function as a …
A. store of value C. standard of deferred payment.
B. unit of account D. medium of exchange.
18. When an economist states that barter is impossible, she doesn’t really mean that barter is
impossible. Her real meaning is that …..
A. barter transactions are relatively costly.
B. barter has no useful place in today’s world.
C. it is impossible for barter transactions to leave parties to an exchange better off.
D. barter is illegal

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19. The problem of the double coincidence of wants can be avoided if…..
A. trade is organized in a central market.
B. money is used to facilitate exchanges. both decentralized and central market
C. barter trades are encouraged
D. both (a) and (b) of the above.
20. Money serves as a standard of deferred payment when…..
A. it is used to buy something now and make payments later on.
B. it is exchanged for goods and services.
C. it has intrinsic value.
D. it is no longer divisible.
21. Money is a medium of exchange because …….
A. It can be used to satisfy any number of needs and desires.
B. Two bills of like denomination have the same value.
C. Two bills of like denomination can be exchanged.
D. It fuels the stock market.
22. A $25,000 price tag on a new car is an example of money as …….
A. a time deposit. C. a store of value
B. medium of exchange. D. a unit of account.
II. Listen to a lecture about history of money and answer the questions
Questions 1-4. Choose the correct letter, A, B or C.
1. The speaker says that money is more than an economic tool and has a
A psychological and historical dimension.
B social and psychological dimension.
C social and historical dimension.
2. According to the speaker, money is an invention resulting from the human capacity to
A allocate symbols a value.
B label the world.
C create special symbols.
3. What does the speaker say about accepting any object as money?
A The community needs to establish procedures for its use.
B Its use needs to be accepted by the user and the community.
C Laws need to be introduced to make it legal tender.

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 4. When bartering goods, the seller had to
A agree a standard of exchange as part of the purchasing process.
B accept whatever the local common medium of exchange was.
C find someone who was willing to purchase the goods for sale.
Questions 5-10. Complete the notes below. Write NO MORE THAN TWO WORDS for each answer.
Commodity money
✓ Commodity money depended on the acceptance of certain objects as money that was inherently
(5) ................................ for every person.
✓ All metals were accepted as commodity money - being convertible into precious tools,
e.g. (6.) ....................... and ................................ .
✓ Metals, e.g.gold and silver, had secondary advantages - identifiable and (7) ................................ .
Metal coins
✓ They acted as a (8) ................................ for exchanging goods and services.
Representative money
✓ When adopted, representative money was a (9) ......................... in human consciousness.
✓ Psychologically, there needed to be a transfer in the sense of value from a usable material object to
an (10) ................................ symbol.
✓ Socially, there had to be a group agreement on the common usage of the symbol.
III. A. Match the currencies with the pictures

A B

yen

sterling

lira

renminbi

dollar

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 B. Match the words in B with the definitions
Sort code
1. A number that identifies a bank
Transfer
2. To move something from one place to another, especially money
3. To change something from one form or system to another Convert

4. A price asked for products or services Charge

5. The amount of money you can get selling and buying money from different countries. Exchange rate

C. Listen to a conversation to complete the note and answer the questions

1. What personal information does the

advisor ask for?
2. What happens if Alice sends dollars?
3. What happens if she sends sterling?
4. What is a SWIFT code?
5. Why does she have to give a reason for
transferring the money?

IV. Read the following passage and answer questions

A The most difficult aspect of money to understand is its function as a unit of account. In linear
measurement we find the definition of a yard, or a metre, easy to accept. In former times these lengths
were defined in terms of fine lines etched onto brass rods maintained in standard laboratories at constant
temperatures. Money, however, is much more difficult to define because the value of anything is
ultimately in the mind of the observer, and such values will change with time and circumstance. Sir
Isaac Newton, as Master of the Royal Mint, defined the pound sterling (£) in 1717 as 113 grains of
pure gold. This took Britain off silver and onto gold as defining the unit of account. The pound was
113 grains of pure gold, the shilling was 1/20 of that, and the penny 1/240 of it. By the end of the 19th
century the gold standard had spread around most of the trading world, with the result that there was a

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single world money. It was called by different names in different countries, but all these supposedly
different currencies were rigidly interconnected through their particular definition in terms of a quantity
of gold.
B In economic life the prices of different commodities and services are always changing with respect
to each other. If the potato crop, for example, is ruined by frost or flood, then the price of potatoes will
go up. The consequences of that particular price increase will be complex and unpredictable. Because
of the high price of potatoes, prices of other things will decline, as demand for them declines. Similarly,
the argument that the Middle East crisis following the Iraqi annexation of Kuwait would, because of
increased oil prices, have led to sustained general inflation is, although widely accepted, entirely
without foundation. With sound money (money whose purchasing power does not decline over time)
a sudden price shock in any one commodity will not lead to a general price increase, but to changes in
relative prices throughout the economy. As oil increases, other goods and services will drop in price,
and oil substitutes will rise in price, as the consequences of the oil price increase work their
unpredictable and complex way through the economy. The use of gold as the unit of account during
the days of the gold standard meant that the price of all other commodities and services would swing
up and down with reference to the price of gold, which was fixed. If gold supplies diminished, as they
did when the 1850s gold rushes in California and Australia were finishing, then deflation (a general
price level decrease] would set in. When new gold rushes followed in South Africa and again in
Australia, in the 1880s and 1890s, the general price level increased, gently, around the world, as there
was more money in circulation.
C The end of the gold standard began with the introduction of the Bretton-Woods Agreement in 1946.
This fixed the value of all world currencies relative to the US dollar, which in turn was fixed to a
specific value of gold (US$0.35/oz). However, in 1971 the US government finally refused to exchange
US dollars for gold, and other countries soon followed. Governments printed as much paper money or
coinage as they wanted, and the more that was printed, the less each unit of currency was worth. The
key problem with these government ‘fiat’ currencies is that their value is not defined; such value is
subject to how much money a government cares to print. Their future value is unpredictable, depending
as it does on political chance. In past economic calculations of the Australian Institute for Public Policy,
incomes and expenditures were automatically converted to dollars of a particular year, using CPI
deflators, which are stored in the Institute’s computers. When the Institute performs economic
calculations into the future, it guesses at inflation rates and includes these guesses in its figures. The
guesses are entirely based on past experience. In Australia most current calculations assume a three to
four per cent inflation rate.

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D The great advantage of the 19th century gold standard was not just that it defined the unit of account,
but that it operated throughout almost the entire world. Anthony Trollope tells us in his diaries about
his Australian travels in 1872 that a pound of meat, selling in Australia for two pence, would have cost
ten pence or even a shilling in the UK. It was this price difference which drove investment and effort
into the development of shipboard refrigeration, and opening up of major new markets for Australian
meat, at great benefit to the British public. Today we can determine price differences between countries
by considering the exchange rate of the day. In twelve months’ time, even a month’s time, however, a
totally different situation may prevail, and investments of time and money made on the basis of an
opportunity at an exchange rate of the day, may actually perform poorly because of subsequent
exchange rate movements. The great advantage of having a single stable world currency is that such
currency would have very high information content. It tells people where to invest their time, energy
and capital, all around the world, with much greater accuracy and predictability than would otherwise
be possible.
Questions 1-4. The reading passage has four sections. Choose the most suitable heading for each
section from the list of headings below.
i. The Price of Gold
ii. The Notion of Money and its Expression
iii. The Rise of Problematic Modern Currencies
iv. Stable Money Compared to Modern “fiat” Currencies
v. The Effects of Inflation
vi. The Interrelationship of Prices
vii. Stability of modern currencies
1. SECTION I: ………………………. 3. SECTION III: ………………………
2. SECTION II: ……………………… 4. SECTION IV: ………………………
Questions 5-8. Using information from the text, match the following causes with a result.
A. Oil substitutes become more expensive
B. Oil substitutes drop in price
C. People developed techniques of transporting it to other places
D. More people went to live in Australia
E. The price of other things goes down, because fewer people could afford to buy them
F. People used gold instead of silver as money
G. All prices went up slightly, everywhere
H. There is no observable effect
I. All prices went down, everywhere

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5. The price of Potatoes goes up…
6. The amount of gold available went up………….
7. The amount of gold available went down………….
8. Meat in Australia was cheaper than elsewhere …………….
Questions 9-13. In the reading passage, the writer compared money based on a gold standard, and
fiat money. Using the information in the passage, match a phrase A, B or C in the box with the
writer’s opinions in each question to show which kind of money is meant.
A. Money based on a gold standard
B. Government fiat monopoly currencies
C. Both money based on a gold standard and fiat currencies
9. The writer states that it has a clearly defined value ……………
10. The writer states that its value by definition varies over time ………………
11. The writer describes its future value as predictable ……………….
12. The writer knows or can calculate its past value ……………
13. The writer believes it makes international investment easier ………………
V. Listen to a talk and choose the correct answer to the following questions
1. Money supply refers to ……..
A. Total volume of money held by public at a particular point of time
B. Total volume of money held by public over a period of time
C. Total volume of money held by the government
D. Total money in hands of the public
2. How is narrow money defined?
A. Total assets that households and businesses use for short-term
investments
B. The total amount of money in circulation in an economy
C. Currency in circulation, checking account deposits, and liquid assets
at the central bank
D. The sum of savings accounts and government bonds
3. What does narrow money, such as coins and notes in circulation,
provide due to its high liquidity?
A. Long-term investments
B. Immediate convertibility to cash without loss of value
C. Medium of exchange function
D. Store of value function

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4. Which of the following will not come under narrow money?
A. Currency in circulation C. Time deposit
B. Demand deposit D. None of these
5. How is broad money defined?
A. Currency in circulation, demand deposits, and traveler's checks
B. The total sum of assets used for short-term investments
C. The total amount of money in circulation
D. The total sum of assets used for payments and short-term investments
6. What is M1 in the context of money supply measures?
A. The broadest measure of money supply
B. The intermediate measure of money supply
C. The narrowest measure of money supply
D. A measure of government spending
7. What does M2 include in addition to the components of M1?
A. Time deposits larger than $100,000 and institutional money market funds
B. Retail money market funds and term repurchase agreements
C. Savings deposits, time deposits below $100,000, and retail money market funds
D. Institutional money market funds and currency in circulation
8. What is the broadest and least liquid measure of money supply according to the passage?
A. M1 C. M3
B. M2 D. Currency in circulation
9. Why did the Federal Reserve stop reporting M3 in 2006, as mentioned in the passage?
A. M3 did not provide any relevant information on economic activity.
B. M3 was replaced by M2 as the preferred measure.
C. M3 was considered too broad to be useful.
D. M3 was not aligned with international standards.
10. What is the primary function of M1, M2, and M3 as measures of money supply?
A. To track international trade balances
B. To estimate government revenue
C. To measure the total quantity of money circulating in the economy
D. To assess the value of physical currency in circulation

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