Problem Set Chapter 3
Problem Set #3: Edited Version
Page 100 – Problems and Applications
1. The three functions of money are medium of exchange, unit of account, and store of value. Medium of exchange refers to money being accepted as everyday currency, that you can go into a store and be confident in the fact that they will accept your money for goods and services. Store of value is defined as the ability of money to retain its value of time; in other words, $100 today will be $100 tomorrow, next month or 6 months from now. Unit of account provides terms in which prices are quoted; meaning that a car dealer will sell you a car for $20,000 instead of 400 cows.
a. A credit card satisfies a medium of exchange and store of value…It does not satisfy a unit of account
b. A painting by Rembrandt is store of value it is not a medium of exchange or unit of account
c. A subway token within the subway satisfies all three functions of money. However, outside of the subway it is not seen as an unit of account or medium of exchange.
a. Actually outside of the subway system, a token satisfies none of the functions of money because even though your $2 dollar subway token will remain $2 for the next time you use it – it cannot be used for any sort of ‘store of value’ outside the system…making each function of money not applicable to the token.
Professor Smith – A silly mistake by me to do the problems that were requested for problem set chapter 5…Here is the second question that I should have completed instead of #6 for Chapter 4.
2. Explain how each of the following events affects the monetary base, the money multiplier, and the money supply
a. The Federal Reserve buys bonds in an open market operation: When the Fed buys bonds, the dollars that it pays to the pubic for the bonds increases the monetary base, which, as a result, increases the money supply. In this case, the money multiplier is not affected as there no change in the reserve-deposit ratio of the currency-deposit
Page 100 – Problems and Applications
1. The three functions of money are medium of exchange, unit of account, and store of value. Medium of exchange refers to money being accepted as everyday currency, that you can go into a store and be confident in the fact that they will accept your money for goods and services. Store of value is defined as the ability of money to retain its value of time; in other words, $100 today will be $100 tomorrow, next month or 6 months from now. Unit of account provides terms in which prices are quoted; meaning that a car dealer will sell you a car for $20,000 instead of 400 cows.
a. A credit card satisfies a medium of exchange and store of value…It does not satisfy a unit of account
b. A painting by Rembrandt is store of value it is not a medium of exchange or unit of account
c. A subway token within the subway satisfies all three functions of money. However, outside of the subway it is not seen as an unit of account or medium of exchange.
a. Actually outside of the subway system, a token satisfies none of the functions of money because even though your $2 dollar subway token will remain $2 for the next time you use it – it cannot be used for any sort of ‘store of value’ outside the system…making each function of money not applicable to the token.
Professor Smith – A silly mistake by me to do the problems that were requested for problem set chapter 5…Here is the second question that I should have completed instead of #6 for Chapter 4.
2. Explain how each of the following events affects the monetary base, the money multiplier, and the money supply
a. The Federal Reserve buys bonds in an open market operation: When the Fed buys bonds, the dollars that it pays to the pubic for the bonds increases the monetary base, which, as a result, increases the money supply. In this case, the money multiplier is not affected as there no change in the reserve-deposit ratio of the currency-deposit