Money serves as a ___ of value, allowing people to save and use it later.

Store

What are the three primary functions of money as defined in economics?

Store of value, unit of account, medium of exchange

True or False: Fiat money has intrinsic value because it is backed by physical commodities.

False. Fiat money is considered materially worthless but holds value due to collective agreement.

What does the Quantity Theory of Money equation MV = PT represent?

M is the money supply, V is the velocity of circulation, P is the price level, and T is the total number of transactions.

According to the Cambridge approach, the demand for money is influenced by which two motives?

Transaction motive and precautionary motive

What is a liquidity trap and why does it occur?

A liquidity trap hinders growth.

• Low interest rates persist.

• Money supply increase ineffective.

• Public fear stifles spending.

True or False: Higher income typically decreases the demand for money.

False. Higher income generally leads to a higher demand for money.

Fill in the blank: In the context of demand for money, the transactions motive is directly proportional to ___ level.

Income

What role does trust play in the effectiveness of money as a medium of exchange?

Trust in currency is essential as it relies on the belief that money will retain its value.

Explain the relationship between interest rates and speculative demand for money.

Speculative demand for money is inversely related to interest rates; as rates increase, demand for cash decreases.

According to Milton Friedman, what is the primary determinant of the demand for money?

Permanent income

What are the three primary functions of money as described in economic theory?

Three primary functions of money

• Store of Value: Saves purchasing power.

• Unit of Account: Prices goods consistently.

• Medium of Exchange: Facilitates trade easily.