Question 1: You studied that money serves as society in 3 functions: A unit of account, a medium of exchange, and a store of value. Different situations are described below. What function (one of the 3 functions) does each of the case/situation serve? Give a short explanation for each.

1. a) Credit cards are widely accepted as a method of payment for both goods and services.
2. b) Tom paid $150,000 for his house in 2010 and sold it for $300,000 in 2019. What function did the house serve during the time Tom owned it?
3. c) Sarah used $10,000 from funds she had invested in certificates of deposit as a down payment to buy a house. What function did this portion of her investments serve when she made the down payment?
4. d) If mollusk shells were accepted as a method of payment in modern-day markets, what economic role would they play in the financial system?

Question 2: For the following list of items, indicate if they are in M1, M2, or neither:

1. a) Your $5,000 line of credit on your Bank of America card
2. b) $50 dollars' worth of traveler's checks you have not used yet
3. c) $1 in quarters in your pocket
4. d) $1200 in your checking account
5. e) $2000 you have in a money market account

Question 3: How do the expansionary and contractionary monetary policies affect the quantity of money? How do these policies affect the cost of borrowing and lending for banks? Please give a short answer.

Question 1: You studied that money serves as society in 3 functions: A unit of account, a medium of exchange, and a store of value. Different situations are described below. What function (one of the 3 functions) does each of the case/situation serve? Give a short explanation for each.

a) Credit cards are widely accepted as a method of payment for both goods and services.

Medium of exchange because of their wide acceptance as a method of payment for both goods and services.

b) Tom paid $150,000 for his house in 2010 and sold it for $300,000 in 2019. What function did the house serve during the time Tom owned it?

Store of value because the house has some monetary value for which it was sold. When house was in possession of Tom it served as store of wealth that could be used anytime to convert into currency.

c) Sarah used $10,000 from funds she had invested in certificates of deposit as a down payment to buy a house. What function did this portion of her investments serve when she made the down payment?

Medium of exchange because she exchanged money to buy house.

d) If mollusk shells were accepted as a method of payment in modern-day markets, what economic role would they play in the financial system?

Medium of exchange because people will be able to use mollusk shells to get goods and services.

Question 2: For the following list of items, indicate if they are in M1, M2, or neither:

a) Your $5,000 line of credit on your Bank of America card

Neither in M1 or M2

b) $50 dollars' worth of traveler's checks you have not used yet

It is part of M1, and because M2 includes M1, it is also part of M2

c) $1 in quarters in your pocket

Currency out in the public hands is part of M1 and M2

d) $1200 in your checking account

Checking deposits are in M1 and M2

e) $2000 you have in a money market account

Money market accounts are in M2 but not M1

Question 3: How do the expansionary and contractionary monetary policies affect the quantity of money? How do these policies affect the cost of borrowing and lending for banks? Please give a short answer.

Expansionary Monetary Policy:

When there is recession in the economy, which means that there is unemployment and less output. In this situation central bank uses Expansionary monetary policy to decrease interest rates and increase money supply through open market operations, reserve requirements, and setting interest rates. Open market operations include buying and selling of securities. When central bank wants to increase money supply it buy securities, when central bank buys securities it gives money and thus supply of money increases. With increase in supply of money, interest rates decrease. With lower interest rates there is less cost of borrowing and lending. When reserve requirements decline, it allows banks to lend a higher proportion of their capital to consumers and businesses. When the benchmark federal funds rate is lowered, the cost of borrowing from the central bank decreases, giving banks more access to cash that can be lent to consumers.

Contractionary Monetary Policy:

When there is inflation in the economy, which means that there is increased employment and more production that heats up the economy and prices increase. In this situation central bank uses Contractionary monetary policy to increase interest rates and decrease money supply through open market operations, reserve requirements, and setting interest rates. Open market operations include buying and selling of securities. When central bank wants to decrease money supply it sells securities, when central bank sells securities it takes money and thus supply of money decreases. With decrease in supply of money, interest rates increase. With increased interest rates there is more cost of borrowing and lending. When reserve requirements increase, it allows banks to lend a lower proportion of their capital to consumers and businesses. When the benchmark federal funds rate is increased, the cost of borrowing from the central bank increases, giving banks lower access to cash that can be lent to consumers.