Question

1-) In the following question, you are asked to determine whether the statements are true or false. Explain your reasoning to get full credit:

c) Assume velocity is constant. Suppose Fed wants to follow a zero-inflation policy. Then, the rate of money growth should be kept equal to zero by the Fed.  

d) Credit Cards are considered money because they are a medium of exchange.

e) Gold is an example of fiat money.

Answer 1

a) False, as per the Quantity theory of money MV=PY of the velocity is considered as constant, if the FEd wants to keep the inflation zero then the money supply increase should equal to the growth of the output in the market.

Then the price and the velocity keeping constant and money growth will be equal to the growth in output.

b) False, credit card is not money we cannot exchange card in exchange of goods but it is takes as a medium to pay for the goods and services.

c) False, fiat money has zero intrinsic value i.e. if the Fed doesn;t have a backing then the value of the currency note will be zero. but gold will have some value backed by Fed or not.