Assignment Unit 4.

3M

Macroeconomics I

I Describe the functions of money.

We have seen 3 different functions of money.

Medium of exchange, store of
value and Unit of account. Medium of exchange means money can our be used for
it
exchange goods services. Store of
or value can be used as mean of saving and
allocating capital. Unit of account is the common unit
by which everyone measures prices
and values

2 What is fiat money? What is commodity money?

·

Fiat money has no intrinsic value and is not backed by any tangible assets.

Commodity money
has intrinsic value. It has a use outside of its use as
money.

3 What are open-market operations, and how do they influence the money supply?

Open market operations are used by the Federal Reserve (Fed) to move the
Federal funds rate and influence other interest rates. The Fed
money supply
can increase the

by purchasing or
selling government bonds.

Y Explain how banks create money.

A fractional-reserve banking system creates Banks create

money. can
money basically
by accepting deposits and making loans.

5 What are the various ways in which the Federal Reserve can influence the money supply?

The Federal Reserve can steer the

money supply
either by Open market operations (OMO)
or discount rate, which is the interest rate the Fed charges on loans to banks. If the Fed uses

OMO, they can increase the base by purchasing government bonds, paying with new dollars. On the
other hard the Fed could lower the discount rate, encouraging banks to borrow
more reserves, to increase monetary base.

6 Write the Quantity equation and explain it

Mxv = PxY

M is the quantity of money, vis the velocity of circulation, is the price level and
Y is the final
output.
The
quantity equation is used to describe the relationship between the money stock
and aggregate expenditure.