Unit 4 assignment Guillermo Valls García

1. There are 3 main functions of money:

Medium of exchange, unit of account and store of value.
Medium of exchange: money can be used for an exchange of goods or services.
Unit of account: unit by which people measure prices and values.
Store of value: used as a means of saving and allocating capital.

2. Flat money: Has no intrinsic value and is not backed by any tangible assets.
Commodity money: Has intrinsic value, it has more than one use apart from money.

3. Open market operations are used by the Federal Reserve to vary the funds rate and
influence other interest rates. The Federal Reserve can also increase money supply
by purchasing or selling government bonds.

4. A fractional-reserve banking system creates money. Banks can create money by

accepting deposits and making loans.

5. The Federal Reserve can adjust the money supply either by Open market operations
or discount rate. If the Federal Reserve uses open market operations they can
increase the base purchasing government bonds by paying with new dollars. On the
other hand the Federal Reserve could lower the discount rate by encouraging banks
to borrow more reserves to increase their monetary base.

6. m * v = p*y
m is the quantity of money
v is the velocity
p is price level
y final output

The quantity equation is used to describe the relationship between the money stock
m and aggregate expenditure.