4.2 Definition, Measurement, and Functions of Money

• What are the three main functions of money?

  Medium of Exchange, Unit of Account, Store of Value
• What does it mean for money to act as a store of value?

  Retains purchasing power
• M1 includes the most liquid forms of money readily available for transactions
• What is the role of money as a medium of exchange?

  Facilitates transactions
• Money as a unit of account enables prices and debts to be easily compared and recorded.


  True
• How does money as a unit of account simplify economic activity?

  Provides a common measure of value
• What is the key difference between M1 and M2 in terms of liquidity?

  M1 is more liquid
• Order the monetary aggregates based on their liquidity from most to least liquid:

  1️⃣ M1

  2️⃣ M2
• Match the role of financial institutions with its explanation:

  Managing Deposits ↔️ Ensuring safety and accessibility of funds

  Providing Loans ↔️ Financing consumption and investment

  Facilitating Savings ↔️ Encouraging wealth accumulation

  Facilitating Investments ↔️ Promoting capital formation
• Money serves as a unit of account by providing a common measure of value.


  True
• What is included in M2 that is not in M1?

  Savings deposits
• The key difference between M1 and M2 is the level of liquidity
• Money as a medium of exchange allows goods and services to be exchanged without the need for barter
• As a medium of exchange, money facilitates transactions without the need for barter
• Match the monetary aggregate with its components:

  M1 ↔️ Currency in circulation + Demand deposits

  M2 ↔️ M1 + Savings deposits + Small time deposits
• M2 provides a broader measure of the money supply by including less liquid monetary assets.

  True
• M2 includes M1 along with savings deposits, small time deposits, and money market mutual funds
• As a medium of exchange, money facilitates transactions without the need for barter
• Order the components of M1 from most to least liquid

  1️⃣ Currency in circulation

  2️⃣ Demand deposits

  3️⃣ Checkable deposits
• M2 includes M1, but M1 does not include M2.


  True
• What is the primary function of money as a medium of exchange?

  Eliminates the need for barter
• What is the purpose of money as a store of value?

  Retaining purchasing power
• Money as a store of value allows wealth to be accumulated and transferred across time.


  True
• M1 includes the most liquid forms of money, readily available for transactions
• Which components of the money supply are included in M1?

  Currency and demand deposits
• Financial institutions act as intermediaries between savers and borrowers, facilitating efficient resource allocation.


  True