Test: Money - JAMB MCQ

Money serves as a medium of exchange, which means it is widely accepted in transactions to buy goods and services. It also acts as a unit of account, providing a standard measure of value for comparing prices and expressing economic transactions. Additionally, money serves as a store of value, allowing individuals to hold wealth in a durable form over time.

Portability is a characteristic of money, as it should be easy to carry and transport. Durability is another important characteristic, ensuring that money remains intact and usable over time. Divisibility is also essential, allowing money to be divided into smaller units to facilitate transactions of varying sizes. 

The demand for money is influenced by several factors. Interest rates play a significant role as they affect the opportunity cost of holding money instead of earning interest by investing or saving. Income levels influence the overall demand for money as individuals require money to meet their daily needs and expenses. Price levels also impact the demand for money, as higher prices require individuals to hold more money to make purchases. 

The supply of money is primarily controlled by the central bank of a country. The central bank has the authority to regulate and manage the money supply through various tools such as open market operations, reserve requirements, and setting interest rates. Commercial banks play a role in the money creation process through lending and deposit activities, but the central bank ultimately has the authority to control the overall supply of money. 

According to the Quantity Theory of Money, an increase in the money supply, assuming other factors remain constant, will lead to inflation. This theory suggests that the total amount of money in an economy directly affects the overall price level. As the money supply increases, there is more money chasing the same amount of goods and services, causing prices to rise. 

The Fisher equation states that the nominal interest rate is equal to the sum of the real interest rate and the expected inflation rate. It represents the relationship between nominal interest rates, real interest rates, and inflation.

When the value of money decreases, it means that the purchasing power of money diminishes. In such a scenario, prices tend to increase to reflect the decreased value of money.

The purchasing power of money is inversely related to the price level. When the price level increases, the purchasing power of money decreases, meaning that each unit of currency can buy fewer goods and services. 

The components of the quantity theory of money are the money supply, the velocity of money (the rate at which money circulates in the economy), and the price level. These components are interconnected and help explain the relationship between changes in the money supply and changes in the price level. 

According to the quantity theory of money, inflation is primarily caused by increases in the money supply. When the money supply grows faster than the output of goods and services in the economy, it leads to an excess of money in circulation, resulting in increased prices.