Question

1.What are the three purposes of money? .Which is the most important of the three and why?

a.My parents were married in Lynnfield in 1970 and were given a china set from England. I have that set today in almost brand new condition and a $5 bill. Which is worth more and why?

b.Which is more liquid and why?

2.Why will M1 never have as much money as M2?

a.Is M1 or M2 more liquid?

b.Which is more liquid and why?

3.You own a bank and people deposit savings into your bank. Are these deposits an asset or liability for your bank?

a.You own a bank and give loan money to the applicants you approve. Are these loans an asset or liability for your bank?

Answer 1

There are three purposes of money:

1. Money is used to facilitate everyday transactions. It is a medium of exchange.

2. Money is way of storing wealth. Money held in cash form is a store of value.

3. Money is also used as a unit of account. You can use to measure the relative value of goods and services.

Money role as a medium of exchange is it's most important function. Because without money, people will have to go back to barter system, which is a very difficult way of exchanging goods and services.

A $5 bill worth is more than the china set. Because a $5 can be used as a medium of exchange. You can buy goods and services from $5. But it is very difficult to buy other goods and services in exchange of a china set (barter system).

A $5 bill is more liquid than a china set. Because a $5 can be used to buy other goods more easily and quickly than a china set.