"economics"exercise:Statement of currency characteristics

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Questions 1:

Which of the following statements regarding the characteristics of money is correct?

A 、Compared to a barter economy, an economy in which money is the medium of exchange has more prices.

B 、Money as a medium of exchange depends on shared beliefs about its value.

C 、Money’s low value relative to its weight enhances wealth portability.

Questions 2:

If a central bank reduces the money supply, this move will most likely lead to a:

A、 rise in nominal interest rates and a decline in aggregate price level.

B 、rise in nominal interest rates and a rise in aggregate price level.

C 、decline in nominal interest rates and a rise in aggregate price level.

View answer resolution

【Answer to question 1】B

【analysis】

B is correct. For money to serve as a medium of exchange, economic agents must have a shared belief in its value and that it will retain its value. Without such shared beliefs, money would not be able to fulfill its role as a store of value, thereby jeopardizing its status as a medium of exchange.

A is incorrect because in its role as a unit of account, money drastically reduces the number of prices in an economy compared to a barter economy. In a barter economy, prices must be established for a good in terms of all other goods for which it might be exchanged.

C is incorrect because a high value (rather than low value) relative to its weight is a characteristic of money that enables it to serve as a medium of exchange. Money’s high value relative to its weight offers the convenience of wealth portability in fulfilling a variety of transaction needs.

【Answer to question 2】A

【analysis】

A is correct. A reduction in the money supply (leftward shift) leads to an increase in nominal rates. Furthermore, on the basis of the quantity theory of money, a reduced money supply makes money more valuable (thus a higher interest rate), which reduces aggregate price levels.

B is incorrect because a reduction in the money supply decreases, rather than increases, aggregate price levels.

C is incorrect because a reduction in the money supply will increase, rather than decrease, nominal interest rates.

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