Question 1

Carolina holds $2,000 in her savings account in case of a medical emergency.This represents the

Accepted Answer

Carolina's savings account represents the precautionary demand for money, which is the demand for money to cover unexpected expenses or emergencies. This is different from the transaction demand for money, which is the demand for money to cover day-to-day expenses, or the income demand for money, which is the demand for money to invest or save for future goals. The medical savings account is a term often used for specific accounts designed for medical expenses, but it is not applicable in this scenario.

Question 2

During periods of hyperinflation,money does not hold its value long enough to make everyday market purchases; therefore,people hold as little as possible for as short a time as possible.This description implies that the

Accepted Answer

Holding money for everyday purchases refers to the transactions demand for money, which will be lower when money rapidly loses its value during periods of hyperinflation. Therefore, the transactions demand for money has decreased.

Question 3

The choice to hold money in the form of cash

Accepted Answer

Holding money in the form of cash results in forgone interest as the money is not being invested or earning interest.

Question 4

The use of money and credit controls to change the macroeconomy is

Accepted Answer

Monetary policy involves using money and credit controls, such as changing interest rates and reserve requirements, to influence the overall economy. It is a commonly used tool by central banks, including the Federal Reserve in the United States.

Question 5

Mark holds $100 in cash in his wallet to make purchases for gas and groceries.This represents the

Accepted Answer

Mark's cash holdings serve the purpose of facilitating day-to-day transactions for gas and groceries. Therefore, this represents the transactions demand for money. The precautionary demand for money is holding cash as a buffer against unexpected expenditures, while the speculative demand is holding cash as an investment. The market demand for money refers to the aggregate demand for money by all economic agents in an economy. None of these apply to Mark's situation.

Question 6

Money held for making everyday market purchases represents the

Accepted Answer

Transactions demand for money refers to the money held for making everyday market purchases, such as groceries or gas. The other options refer to different types of demand for money, but do not specifically relate to everyday market purchases.

Question 7

The speculative,transactions,and precautionary demands for money added together give the

Accepted Answer

The speculative, transactions, and precautionary demands for money together make up the total demand for money in the market, and therefore give us the market demand curve for money.

Question 8

Money held to take advantage of future financial opportunities is the

Accepted Answer

Speculative demand for money refers to the money held for taking advantage of future financial opportunities, such as investing in stocks or buying assets at a discounted price. The other options, namely transactions demand, precautionary demand, and portfolio demand, refer to the money held for daily transactions, unexpected expenses, and diversification purposes, respectively.

Question 9

The transactions demand for money is most closely associated with which of the following functions of money?

Accepted Answer

The transactions demand for money refers to the need for money to facilitate the exchange of goods and services. This closely aligns with the function of money as a medium of exchange, allowing individuals to buy and sell goods and services with ease. The other functions of money (standard of deferred payment, store of value, and standard of value) are not as closely related to the transactions demand for money.

Question 10

The cost of holding money in the form of cash is

Accepted Answer

The cost of holding money in the form of cash is not nonexistent, as there is an opportunity cost associated with it. By holding cash, you forgo earning interest on that money through alternative investment options such as a bank account or a bond. Therefore, the cost of holding money in the form of cash is equal to the interest you would have received had you invested the money instead. This cost can vary based on the prevailing interest rates and investment options available.

Question 11

Individuals hold precautionary balances in order to

Accepted Answer

Individuals hold precautionary balances to have funds available for unexpected needs or emergency purchases, allowing them to manage unforeseen expenses without having to liquidate investments or borrow money.

Question 12

The speculative demand for money is related to money functioning as a

Accepted Answer

The speculative demand for money is the demand for money as a store of value or asset. It arises from the desire of individuals to hold money as a means of postponing current consumption to future periods. This demand is unrelated to the transactional demand for money, which is driven by the need to use money as a medium of exchange in daily transactions. Therefore, the correct answer is A- store of value.

Question 13

Currency held by the public,balances in transactions accounts,plus balances in most savings accounts and money market mutual funds are the

Accepted Answer

Currency held by the public, balances in transactions accounts, and balances in most savings accounts and money market mutual funds are all components of M2, which is a broader measure of the money supply. Therefore, the correct choice is D.

Question 14

Which of the following causes the opportunity cost of holding money in the form of cash to decrease?

Accepted Answer

Lower interest rates decrease the opportunity cost of holding money in the form of cash, as the return on alternative investments will be lower. Alternatives such as stocks or bonds will have lower yields, lowering the cost of holding cash.

Question 15

The money supply M2 includes M1

Accepted Answer

M2 includes M1, which is the total amount of currency in circulation, demand deposits, and traveler's checks. In addition to these, M2 also includes balances in savings accounts and money market mutual funds. This is because these accounts are easily accessible and can be converted to cash quickly. However, M2 does not include currency held in private bank vaults or in the Federal Reserve vaults, as this cash is not in circulation. It also does not subtract balances in savings accounts, money market mutual funds, or short-term certificates of deposit.

Question 16

____________ is the price paid for the use of money.

Accepted Answer

The interest rate is the price paid for the use of money. It is the percentage of the principal amount that a borrower pays to a lender as compensation for borrowing money.

Question 17

Ceteris paribus,the quantities of money people are willing and able to hold

Accepted Answer

According to the theory of the demand for money, ceteris paribus, the quantity of money people are willing to hold increases as interest rates fall. This is because lower interest rates reduce the opportunity cost of holding money (i.e. the foregone interest income from holding interest-bearing assets), making money relatively more attractive. As a result, people may hold more of their wealth in the form of money balances instead of interest-bearing assets, thereby increasing the quantity of money demanded.

Question 18

The choice about how and where to hold idle funds is the

Accepted Answer

Idle funds are held as part of the portfolio decision, which involves investing in different assets to achieve a balance between risk and return. Holding idle funds in cash or liquid securities can provide some level of safety and liquidity, but may not generate significant returns. Therefore, the best choice would be to invest idle funds in low-risk and low-cost options such as money market funds or short-term bonds.

Question 19

Money held to buy bonds in the future represents the

Accepted Answer

Money held to buy bonds in the future represents the speculative demand for money, as individuals are holding money with the expectation that the price of the bonds will decrease and they can buy them at a lower price in the future.

Question 20

Currency held by the public plus balances in transactions accounts are the

Accepted Answer

Currency held by the public plus balances in transactions accounts are part of the money supply (M1). Total reserves and required reserves refer to the amount of money held by banks and do not include currency held by the public. Money supply (M2) includes M1 plus additional types of savings deposits and money market mutual funds, which are not mentioned in the question prompt.

Quiz 15: Monetary Policy