Money and banking: Practice Questions

Which function of money allows it to act as a common denominator, enabling individuals to compare the relative values of different goods and services within an economy?

In the context of the money market, what is the most likely impact of a decrease in the general price level on the demand for money and the equilibrium interest rate, assuming the money supply remains constant?

According to the Keynesian Liquidity Preference theory, what would be the immediate effect on the equilibrium interest rate if there is a significant increase in the general price level, assuming the money supply remains constant?

According to the Quantity Theory of Money, if the velocity of circulation (V) and the real level of transactions (T) remain constant, what will be the effect of a \( 5\% \) increase in the money supply (M)?

Briefly state the four traditional functions of money that enable it to facilitate economic transactions and serve as a reliable financial instrument.

Using the quantity theory of money equation \( MV = PT \), explain how a change in the money supply \( M \) affects the general price level \( P \), assuming the velocity of circulation \( V \) and the volume of transactions \( T \) are constant.