Economics Micro & Macro (CliffsAP)

■ Government:The government has given currency value by granting its ability to be exchanged for goods and

services. People feel confident exchanging currency for goods and services because the government has made it

legal tender.

■ Scarcity:The supply and demand of money dictates its value. The more money in the economy, the less value it

holds. Purchasing power declines if there is too much money in the economy. On the other hand, the less money

in the economy, the greater consumers’ purchasing power becomes.

Mini-Review

1. Which of the following is not a function of money?
   A. Store of value
   B. Medium of exchange
   C. Interest rates
   D. Unit of account
   E. None of the above


2. Which one of the following is not a part of M1?
   A. Checkable deposits
   B. Coins
   C. Paper money
   D. Savings accounts
   E. Travelers checks


3. Which one of the following is an example of commodity money?
   A. Paper currency
   B. Coins
   C. Travelers checks
   D. Silver
   E. Checkable deposits

Mini- Review Answers

1. C.Interest rates are not an example of a function of money. Interest is the cost, or price, of money. The three
   functions of money are a unit of account, a medium of exchange, and a store of value.


2. D. Savings accounts are not a part of M1 because of their lack of liquidity relative to checkable deposits, paper
   currency, coins, and travelers checks.


3. D. Silver is a form of commodity money. Silver has intrinsic value; paper money and coins do not have the same
   intrinsic and extrinsic value.

The Federal Reserve and Member Banks

The United States’ central bank is the Federal Reserve. The Federal Reserve is made up of the Board of Governors, who
are the monetary policymakers in the United States. The Board of Governors consists of seven appointed individuals
who are nominated by the president of the United States and approved by the U.S. Senate. Terms are 14 years and are
staggered so that a new member will be appointed every 2 years. The president selects the chairperson and vice chair-
person of the Board from among the members. The chairperson and vice chairperson serve four-year terms and can be
reappointed to new four-year terms by the U.S. president.

Monetary Policy