Tag: liquidity preference and profit

Questions Related to liquidity preference and profit

Which of the following function does money serve when used to purchase or sell different goods and services?

economics theories of distribution functions of money value, nature and functions of money liquidity preference and profit

  1. Store of value

  2. Medium of exchange

  3. Standard of value

  4. Display of power

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Correct Option: B
Explanation:

Money refers to a common medium of exchange that is issued under the law of government and acts as a legal tender for the whole country. As a medium of exchange, money functions as a mode of exchanging goods and services. In this function of money, money is used to purchase or sell different goods and services in the market. 

To check the accuracy of index by shifting the base year, which test is used ________________.

economics theories of distribution functions of money value, nature and functions of money liquidity preference and profit

  1. Circular test

  2. Time reversal test

  3. Unit test

  4. None

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Correct Option: A

Which of the following is not a characteristic of a price taker?

economics theories of distribution functions of money value, nature and functions of money liquidity preference and profit

  1. TR=P x Q

  2. AR=Price

  3. Negatively - sloped demand curve

  4. Marginal Revenue = Price

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Correct Option: C
Explanation:

Price taker firm exist in ease of perfect competition where the demand curve is a straight line parallel to the x-axis as the firm can sell any amount of the commodity at the same price. So demand curve will not be negatively sloped.

What functions are performed by money?

economics theories of distribution functions of money value, nature and functions of money liquidity preference and profit

  1. Served as a medium of exchange

  2. Common measure of value

  3. Store of value

  4. All the above

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Correct Option: D
Explanation:

Money refers to a common medium of exchange that is issued under the law of government and acts as a legal tender for the whole country. The functions performed by money are as follows: 

1. Medium of exchange: As a medium of exchange, it refers to a function of money in which money is considered as a mode of exchanging goods. This function of money solved the main problem of barter system which was double coincidence of wants.

2. Common measure of value: As a measure of value, it refers to a function of money that helps in determining the value of goods and services. Money is taken as the common denominator while measuring the value of goods and services in monetary terms.

3. Store of value: As a store of value, it refers to the function of money  that helps individuals in storing their wealth in the form of money. Therefore, money acts as an asset that sustains value over a period of time.


Which of the following is the main function of money according to modern economists ?

economics theories of distribution functions of money value, nature and functions of money liquidity preference and profit

  1. Medium of exchange

  2. Common measure of value

  3. Store of value

  4. All of the above

Show answer
Correct Option: C
Explanation:

Money refers to a common medium of exchange that is issued under the law of government and acts as a legal tender for the whole country. The main function of money according to modern economics is money as a store of value. As a store of value, money functions by helping individuals to store their wealth in the form of money. Therefore, money acts as an asset that sustains value over a period of time because it is non-perishable and inexpensive form of storage. 

Money acts as a means of calculating relative prices of goods & services.

economics theories of distribution functions of money value, nature and functions of money liquidity preference and profit

  1. True

  2. False

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Correct Option: A
Explanation:

True.

Money refers to a common medium of exchange that is issued under the law of government and acts as a legal tender for the whole country. As a measure of value, money functions by determining the value of goods and services in the economy. Money is taken as the common denominator while calculating relative prices of all goods and services in the economy.

When the liquidity trap occurs the demand for money.

economics theories of distribution functions of money value, nature and functions of money liquidity preference and profit

  1. Is perfectly interest elastic

  2. Is perfectly interest inelastic

  3. Means that an increase in money supply leads to a fall in the interest rate

  4. Means that an increase in the money supply leads to an increase in the interest rate

Show answer
Correct Option: A
Explanation:

A liquidity trap is an economic situation where people hoard financial capital instead of investing or spending it as the interest rates are low and savings rates are high which renders monetary policy ineffective. So, people believe that the interest rates will soon rise, which might decrease the prices of the bonds. Therefore, the demand for money depends on the rate of interest in the economy which hence makes the demand for money perfectly interest elastic. 

As a measure of value money provides

economics theories of distribution functions of money value, nature and functions of money liquidity preference and profit

  1. Its holder with perfect liquidity

  2. Its fixed return in future

  3. A common denominator for determining value of goods

  4. A mechanism for allocating resources and distributing output

Show answer
Correct Option: C
Explanation:

Money as a measure of value, helps in determining the value of goods and services in the economy. Money is taken as the common denominator while measuring the value of goods and services in the economy. Therefore, with the help of this function everything can be measure in a common denominator or unit. 

Out of the following which assets is most liquid?

economics theories of distribution functions of money value, nature and functions of money liquidity preference and profit

  1. shares of stock

  2. government securities

  3. land

  4. currency

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Correct Option: D
Explanation:

Liquid asset refers to the assets which are either in the form of cash or can easily be converted in to cash. Since currency of any country is already in the form of cash. Therefore, currency is considered the most liquid asset among all the assets in the economy. 

When the liquidity trap occurs the demand for money ________________.

economics theories of distribution functions of money value, nature and functions of money liquidity preference and profit

  1. becomes perfectly interest elastic

  2. becomes perfectly interest inelastic

  3. means that an increase in money supply leads fall in the interest rate

  4. means that an increase in the money supply to an increase in the interest rate

Show answer
Correct Option: A
Explanation:

A liquidity trap is an economic situation where people hoard financial capital instead of investing or consuming it as the interest rates are low and savings rates are high which renders the monetary policy ineffective. So, people believe that the interest rates will soon rise which might decrease the prices of the bonds. Therefore, the demand for money depends on the rate of interest in the economy which hence makes the demand for money perfectly interest elastic.