1. Define Money. What are the Function of money?

Money is anything that is generally accepted as a medium of exchange.

Function of Money:
1. Medium of exchange (or means of payment) neatly eliminates the double coincidence
of-wants problem. Under a monetary system, money is exchanged for goods or services
when people buy things; goods or services are exchanged for money when people sell
things. No one ever has to trade goods for other goods directly. Money is a lubricant in the
functioning of a market economy
2. A Store of Value: Economists have identified other roles for money aside from its
primary function as a medium of exchange. Money also serves as a store of value—an asset
that can be used to transport purchasing power from one time period to another.
3. Liquidity property of money: The property of money that makes it a good medium of
exchange as well as a store of value: It is portable and readily accepted and thus easily
exchanged for goods.
4. A Unit of Account Money also serves as a unit of account—a consistent way of quoting
prices. All prices are quoted in monetary units.
2. Discuss about money management & optimal balance. What are the
determinants of money demand?
Money management:
Optimal balance:
Determinants of Money Demand:
The interest rate: r (negative effect causes downward-sloping money demand)
The dollar volume of transactions (positive effects shift the money demand curve)
a. Aggregate output (income): Y (positive effect: money demand shifts right when Y
increases)
b. The price level: P (positive effect: money demand shifts right when P increases)

3. What are the functions of Central Bank? How the central banks control
the money supply?/What are the three tools Which the central Bank uses
to achieve its fixed target for money supply?
FUNCTIONS OF THE CENTRAL BANK:
1. Clearing Interbank Payments
 The Central Bank does it.
 The funds move at the speed of electricity from one computer account to another.
2. Lender of last resort: One of the functions of the Central Bank: It provides funds to
troubled banks that cannot find any other sources of funds.
If the Central bank wants to increase the supply of money, it creates more reserves, thereby
freeing banks to create additional deposits by making more loans. If it wants to decrease
the money supply, it reduces reserves.
Three tools are available to the Fed for changing the money supply:
(1) Changing the required reserve ratio;
(2) Changing the discount rate; and
(3) Engaging in open market operations.
4. How does money supply affect the interest rate? Discuss about link
between Goods Market & Money Market.

There are two key links between the goods market and the money market:
■ Link 1: Income and the Demand for Money
Income, which is determined in the goods market, has considerable influence on the
demand for money in the money market.
■ Link 2: Planned Investment Spending and the Interest Rate
The interest rate, which is determined in the money market, has significant effects on
planned investment in the goods market.
5. What are the motives for which money is demanded? How the supply of
money is measured?

How much money to hold involves a trade-off between the liquidity of money and the
interest income offered by other kinds of assets. The main reason for holding money instead
of interest-bearing assets is that money is useful for buying things. Economists call this the
transaction motive. This rationale for holding money is at the heart of the discussion that
follows.
Assumption of Transaction Motive:
ney clear, we need a few simplifying
assumptions.
First, we assume that there are only two kinds of assets available to households: bonds and
money. By “bonds” we mean interest-bearing securities of all kinds.
As noted above, we are assuming that there is only one type of bond and only one market
determined interest rate. By “money” we mean currency in circulation and deposits in
checking accounts that do not pay interest.
 we assume that income for the typical household is “bunched up.” It arrives
once a month at the beginning of the month. Spending, by contrast, is spread out over time;
we assume that spending occurs at a completely uniform rate throughout the month—that
is, that the same amount is spent each day (Figure 11.1). The mismatch between the timing
of money inflow and the timing of money outflow is sometimes called the
nonsynchronization of income and spending.
we assume that spending for the month is equal to income for the month.
Assumption of Speculation motive: One reason for holding bonds instead of money: Because
the market price of interest-bearing bonds is inversely related to the interest rate, investors may
want to hold bonds when interest rates are high with the hope of selling them when interest
rates fall.
Demand-pull inflation: Inflation that is initiated by an increase in aggregate demand.
Cost-push, or supply-side, inflation: Inflation caused by an increase in costs.
Absolute advantage: The advantage in the production of a good enjoyed by one country over
another when it uses fewer resources to produce that good than the other country does.
Comparative advantage: The advantage in the production of a good enjoyed by one country
over another when that good can be produced at lower cost in terms of other goods than it could
be in the other country.
Heckscher-Ohlin theorem
A theory that explains the existence of a country’s comparative advantage by its factor
endowments: A country has a comparative advantage in the production of a product if that
country is relatively well endowed with inputs used intensively in the production of that
product.
TRADE BARRIERS: TARIFFS, EXPORT SUBSIDIES, AND QUOTAS
General Agreement on Tariffs and Trade (GATT) An international agreement .signed by the
United States and 22 other countries in 1947 to promote the liberalization of foreign trade.
European Union (EU) The European trading bloc composed of Austria, Belgium, Denmark,
Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal,
Spain, Sweden, and the United Kingdom.
North American Free Trade Agreement (NAFTA) An agreement signed by the United
States, Mexico, and Canada in which the three countries agreed to establish all North America
as a free-trade zone.
THE CASE FOR PROTECTION
 Protection Saves Jobs
 Some Countries Engage in Unfair Trade Practices
 Cheap Foreign Labor Makes Competition Unfair
 Protection Safeguards National Security
 Protection Discourages Dependency