Econ -Unit 4- Chap 13 Questions

I would suggest spell check this, it's kinda almost 1am and I took my contacts out a while ago, so I've been typing blind. Also, I had a bit of trouble with number 8 (I think it says five actually) so it's not finished, and if anyone can figure out the answer, please let me know, cuase I got nothing. Also ignore the numbering, it got kinda funky when I pasted it here.

1. What are the three basic functions of money? Describe how rapid inflation can undermine money's ability to perform each of the three functions.
   
   
2. 1. Medium of exchange = Money is not worth as much, so it will take more to purchase the same goods and labor.
      
   2. Unit of account = Money is used to measure the worth of individual goods, in the event of rapid inflation money can no longer measure accurately
      
   3. Store value = Money loses it's value so it is no longer the best asset to keep.
      
      

      
      

      It may also result in the people no longer accept it as a medium of exchange
      

      
      

3. What are the components of the M1 supply? What is the largest component? Which of the components of M1 is legal tender? Why is the face value of a coin greater than its intrinsic value? What near-monies are included in M2 money supply? What distinguished the M2 and M3 money supplies?
   
   

   Coins, paper money, and checkable deposits. Paper money. Currency and checkable deposits. So that people can't melt down the coin and sell its metal for greater than the coins initial value. Small time deposits, savings deposits, and money market mutual funds. The size of the time deposits.
   

   
   

4. What backs the money supply in the US? What determines the value of money? How does the value of money relate to the price level? Who in the US is responsible for maintaining the money's value?
   
   

   Gold. Acceptability, legal tender, and relative scarcity. The value of money is inversely related to the price level. The Federal Reserve.
   

   
   

5. Assume that the following data characterize a hypothetical economy: money supply = $200 billion; quantity of demanded for transaction = $150 billion; quantity of money demanded as an asset = $10 billion at 12% interest, increasing by $10 billion for each 2 percentage point fall in the interest rate
   
   
   1. What is the equilibrium interest rate? Explain.
      
   2. At the equilibrium interest rate, what are the quantity on money supplied, the total quantity of money demanded, the amount of money demanded for transactions, and the amount of money demanded as an asset?
      
      
      1. 2% To find the equilibrium interest rate you combine the amount demand for transaction and the amount demanded for assets on the graph. So starting at $150 billion, increasing $10 billion every time the interest rate drops 2% you have the line: (-1/5)x+42. This line crosses our second line, x=200, representing the money, supplied at 2. The 2, therefore, represents our equilibrium interest rate
         
      2. Quantity of money supplied = $200 billion. Total quantity demand = $160 billion. The amount demanded for transactions =_______. The amount demanded as an asset = $200 billion
         
         

         
         

6. Assume that the money market is initially in equilibrium, and that the money supply is then increased. Explain the adjustments toward a new equilibrium interest rate. Will bond prices be higher or lower at the new equilibrium rate of interest? What effects would you expect the interest-rate change to have on the levels of output, employment, and prices? Answer the same questions for a decrease in money supply.
   
   

   Interest rates will fall as people initially try to reduce their money holdings by buying bonds. Not the opportunity cost of holding money is lower households and businesses will increase the amount of currency they are willing to hold, eventually reaching the new equilibrium. Bond prices will increase. Initially, though, demand goes up, bringing prices with it. There will also be a decrease in output and employment. Inflation time!