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Indicate whether the following statements are True (T) or False (F)
Indicate whether the following statements are True (T) or False (F). You may answer this question on the question sheet
---------- M1 is both larger and more liquid than M2.
---------- Credit cards are a medium of exchange.
---------- Assume that when $10,000 cash enter the banking system, the money supply ultimately increases by $200,000. Assume also that all banks do not hold excess reserves and that the entire money supply consists of demand deposits. Then the total legal reserves for all banks will amount to $20,0000, and total loans and investments for all banks will be equal to $ 180,000.
---------- In the months of May and June, people in Saudi Arabia hold a larger part of their money in the form of currency (cash) rather than depositing their money in the banks, because they intend to shop and travel for the summer vacation. As a result, other things the same, the money supply increases.
Expert Solution
1. False. Only central Bank can influence the money supply by changing the reserve requirements. If banks has to keep all of their money as resrves, they can not lend anything and money supply can not be increased in the economy.
2. False. When money functions as a unit of account, it's value can be measured in a specific currency and is dvisible , countable.The money deposited in banks also serves this function.
3. True. Collection of jewellery is considered as commodity money and is used historically.It is a kind of money that derives it's value from the commodity. At present, ecomomies use fiat money. Jewellery serves the function of store of value but they are not easily acceptable as a medium of exchange. We can not go to a store and buy shoes in exchange of gold easily.
4. False. A credit card is not similar to cheques in economics. Although credit cards serves the function of medium of exchange like cheques but since credit cards are liability, they don't serve the function of store of value.For store of value, assets has to be there. Liabilities can't store value.
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