1) What are the three functions that a commodity must fulfill to be useful as money?

2) What is the difference between the M1 and M2 definitions of the money supply?

3) Explain how the GDP and interest rate are related to the transactions and asset demands for money.

4) Be sure to answer all pats of this question, and to label those parts accordingly

1.The total demand for money is equal to the transactions demand plus the asset demand for money.

a)Assume that each dollar held for transactions purposes is spent on the average five times per year to buy final goods and services. If the nominal GDP is $10,000 billion ($10 trillion) what is the transaction demand?

b)The table below shows the asset demand at certain rates of interest. Using your answer to part (a), complete the table to show the total demand for money at various rates of interest.

Interest Rates (in %) Asset demand (billions) Total demand (billions)

10 $30 ?

8 $60 ?

6 $90 ?

4 $120 ?

c) If the money supply is $2060 billion, what will be the equilibrium rate of interest?

d) If the money supply rises, will the equilibrium rate of interest rise or fall?

e) If GDP rises, will the equilibrium rate of interest rise or fall?

5) How do the high rates of inflation affect the acceptability of a nation's currency?