Chapter 23, Problem 7MCQ

To determine

The correct option that defines the money supply in US.

Answer to Problem 7MCQ

Option d is correct.

Explanation of Solution

Explanation for correct option:

d.

Money supply refers to the financial asset’s total value in the economy which is considered as money. It can be measured through monetary aggregates either as M1 or as M2. M1 includes all the currency in circulation, cash, checkable deposits, etc. M2 includes near money or less liquid assets that can be converted into cash easily. Therefore, option d is correct.

Explanation for incorrect options:

a.

Money supply does not only include currency in circulation but also traveler’s check, checkable deposits, near money, etc. Therefore, option a is incorrect.

b.

Money supply includes liquid assets only. Therefore, option b is incorrect.

c.

Commodity backed money is a type of money where currency value depends on the commodity. It was commonly used in historical period. Therefore, option c is incorrect.

e.

Near-money refers to the less liquid asset that can be converted into cash quickly. Money supply includes both M1 and M2. Therefore, option e is incorrect.

Economics Concept Introduction

Money: Money is the medium of exchange through which goods and services can be traded. It can perform three main functions i.e. medium of exchange, store of value and unit of account.