4.1 Money and Financial Assets

• What are the primary functions of money?

  Medium of exchange, unit of account, store of value
• Money as a store of value allows individuals to save wealth while retaining purchasing power.

  True
• Fiat money has no intrinsic value, but its value comes from public trust and government declaration.
• How does money as a medium of exchange facilitate trade?

  Reduces the need for barter
• What are the components of the M1 money aggregate?

  Currency, demand deposits, traveler's checks
• Why is M2 broader than M1?

  Includes less liquid assets
• Stocks generally have higher risk and return compared to bonds.
• Bonds are debt instruments issued by governments or corporations.


  True
• Money as a medium of exchange reduces transaction
• Fiat money has no intrinsic value and is declared legal tender by the government
• The M2 money aggregate includes M1 and additional less liquid assets
• Stocks have higher risk and higher return compared to bonds.
• Bonds are considered safer with lower returns and medium liquidity
• What is the risk level associated with bonds?

  Lower
• What is the liquidity level of stocks?

  Medium
• Match the function of money with its example:

  Medium of Exchange ↔️ Buying groceries using cash

  Unit of Account ↔️ Comparing prices of two cars

  Store of Value ↔️ Depositing money in a savings account
• Match the type of money with its definition and source of value:

  Commodity Money ↔️ Intrinsic value from raw material

  Fiat Money ↔️ Declared legal tender by government

  Digital Money ↔️ Exists in electronic form
• Order the components of M1 money aggregate from most to least common:

  1️⃣ Currency

  2️⃣ Demand Deposits

  3️⃣ Traveler's Checks

  4️⃣ Other Checkable Deposits
• M2 is broader than M1, incorporating assets that can be easily converted to cash
• Match the financial asset with its characteristics:

  Stocks ↔️ Higher risk, higher return, medium liquidity

  Bonds ↔️ Lower risk, lower return, medium liquidity

  Derivatives ↔️ Highest risk, highest return, lower liquidity
• The M2 money aggregate includes M1 plus savings deposits, small time deposits, and money market mutual funds
• Stocks represent ownership shares in a company
• Match the key characteristic of financial assets with its definition:

  Risk ↔️ The potential for loss

  Return ↔️ The anticipated profit
• Bonds are debt instruments issued by corporations or governments
• What is the typical risk and return level for bonds?

  Lower risk, lower return
• What role do financial assets play in the economy?

  Transfer funds from savers to borrowers
• Money as a medium of exchange reduces transaction costs.
• Match the function of money with its description:

  Medium of Exchange ↔️ Facilitates transactions without barter

  Unit of Account ↔️ Provides a standard measure of value

  Store of Value ↔️ Enables saving wealth for future use
• What is digital money and how is it transferred?

  Electronic form, without physical currency
• Money as a medium of exchange reduces transaction costs.
• The M2 money aggregate includes M1 and additional less liquid assets.
• M2 assets may have restrictions or penalties for early withdrawal.


  True
• What is the primary difference between stocks, bonds, and derivatives in terms of liquidity?

  Stocks and bonds have medium liquidity, derivatives have lower liquidity
• Derivatives derive their value from an underlying asset
• Bonds are debt instruments issued to raise capital and have lower risk than stocks.

  True
• Mutual funds provide diversification, balancing risk and return, and maintaining liquidity
• Stocks offer higher returns but come with higher risk
• Mutual funds provide diversification, allowing investors to balance risk
• What are the three main functions of money?

  Medium of exchange, unit of account, store of value
• Fiat money has intrinsic value derived from its material composition.

  False