Questions for Review1. Money has three functions: it is a store of value, a unit of account, and a medium ofexchange. As a store of value, money provides a way to transfer purchasing power fromthe present to the future. As a unit of account, money provides the terms in whichprices are quoted and debts are recorded. As a medium of exchange, money is what weuse to buy goods and services.2. Fiat money is established as money by the government but has no intrinsic value. Forexample, a U.S. dollar bill is fiat money. Commodity money is money that is based on acommodity with some intrinsic value. Gold, when used as money, is an example of com-modity money.3. In many countries, a central bank controls the money supply. In the United States, thecentral bank is the Federal Reserve—often called the Fed. The control of the moneysupply is called monetary policy.The primary way that the Fed controls the money supply is through open-marketoperations, which involve the purchase or sale of government bonds. To increase themoney supply, the Fed uses dollars to buy government bonds from the public, puttingmore dollars into the hands of the public. To decrease the money supply, the Fed sellssome of its government bonds, taking dollars out of the hands of the public.4. The quantity equation is an identity that expresses the link between the number oftransactions that people make and how much money they hold. We write it asMoney × Velocity = Price × TransactionsM × V = P × T.The right-hand side of the quantity equation tells us about the total number of transac-tions that occur during a given period of time, say, a year. T represents the total num-ber of transactions. P represents the price of a...
