Question

1. Explain the working of the interest rate mechanism.

2. Why is it wrong to consider cryptocurrencies money in the U.S. economy today? What do they appear to function as? Fully explain.

3. What challenges need to be resolved to make cryptocurrencies a valid replacement for the U.S. dollar?

Answer 1

1 Through an instrument like open market sale of securities, money supply falls. As a result interbank rate increases. As cost of loans to banks rises they inturn increase interest charged on loans they lend. Thus businessmen make less investments and consumers consume less. Hence AD falls. Reverse happens in case of easy monetary policy

2 Because they aren't frequently used as means of payments and store of value. They mainly serve as investment for speculation

3 Govt needs to back them. They must be legal and people should accept them as means of payment and store of value