#1
What is the primary function of money in an economy?
To act as a medium of exchange
ExplanationFacilitates transactions between parties.
#2
Which of the following is a component of the money supply in most economies?
Currency in circulation
ExplanationPhysical money available in the economy.
#3
What does the 'liquidity preference' theory of money demand suggest?
People demand money for transaction purposes and to avoid interest-bearing assets
ExplanationPreference for liquid assets over interest-earning assets for transactions.
#4
In the context of money supply, what does M1 include?
Currency in circulation and demand deposits
ExplanationM1 encompasses physical money and demand deposits.
#5
Which monetary policy tool involves the buying and selling of government securities by the central bank to control the money supply?
Open market operations
ExplanationCentral bank's actions in securities markets.
#6
What is the function of the central bank's discount rate in the context of money supply?
To regulate the interest rates in the banking sector
ExplanationCentral bank's influence on loan rates.
#7
Which of the following is a factor affecting the demand for money according to the Keynesian approach?
Government fiscal policy
ExplanationGovernment spending influences the need for money.
#8
What is the relationship between the nominal interest rate and the demand for money, according to the liquidity preference theory?
Inverse relationship
ExplanationAs interest rates rise, demand for money decreases.
#9
What does the equation of exchange (Quantity Theory of Money) express?
The relationship between money supply and real GDP
ExplanationRelates money supply to economic output.
#10
According to the classical quantity theory of money, what is the long-run effect of an increase in the money supply?
Decrease in prices
ExplanationIncrease in money leads to lower prices over time.
#11
In the context of money demand, what is the income elasticity of money demand?
The responsiveness of money demand to changes in income
ExplanationHow demand for money changes with income fluctuations.