Question

State whether each of the following statements is true or false. Explain your answers in one or two sentences.

When commodity money is the only type of money, a decrease in the price of the commodity serving as money is inflation.

The same money is always used as both a unit of account and a medium of exchange at any one time in any one country.

The smaller the reserve ratio at banks, the larger the money multiplier.

The Federal Reserve reduces reserves by buying government bonds.

Answer 1

1. True.

If the relative price of the commodity money becomes lower, we need more commodity money to purchase goods and services. This leads to inflation.

2.False.

For example, in many third world countries, the US dollar or Euro are used as medium of exchange while the prices are marked with local currencies.

3. True.

Money multiplier is proportional to the reciprocal of reserve ratio.

4. False.

Open market purchase of government bonds by the Fed, increases the money supply.