These are original Marlbridge practice questions, not past exam questions. All questions use Valdoria, a fictional country whose currency is the valda (VD); all figures are fictional. The rubrics are a suggested Marlbridge rubric to help you check your work; they are not an official scoring guideline. Definitions used throughout: M1 = currency in circulation + demand (checkable) deposits; M2 = M1 + savings deposits + small time deposits + retail money market funds; monetary base = currency in circulation + bank reserves.
Question 1 (multiple choice · foundation)
A Valdorian price-comparison website shows that one phone costs VD 280 and another costs VD 350, so shoppers can see at once which is cheaper. Which function of money does this best illustrate?
- (A) Medium of exchange
- (B) Unit of account
- (C) Store of value
- (D) Double coincidence of wants
Answer and explanation
Answer: (B). The prices are stated in valdas so that values can be measured and compared. That is the unit of account function. Nothing is being paid for yet.
- (A) needs an actual payment. Comparing prices on a website is not a payment.
- (C) is about holding purchasing power to spend later. Nobody is saving money here.
- (D) is not a function of money. It is the problem of barter that money solves.
Question 2 (multiple choice · core)
Valdoria’s central bank publishes these figures (VD billion): currency in circulation 85; demand deposits 215; savings deposits 310; small time deposits 140; retail money market funds 60; bank reserves 45. What is M1?
- (A) VD 130 billion
- (B) VD 300 billion
- (C) VD 610 billion
- (D) VD 810 billion
Answer and explanation
Answer: (B). M1 = currency in circulation + demand deposits = 85 + 215 = VD 300 billion.
- (A) is currency + bank reserves = 85 + 45, which is the monetary base, not M1.
- (C) adds savings deposits to M1 (300 + 310). Savings deposits are near-money and belong in M2.
- (D) is M2 = 300 + 310 + 140 + 60. M2 includes M1 plus the less liquid near-money.
Question 3 (multiple choice · core)
A Valdorian household transfers VD 2,000 from its checking account into a retail money market fund. Assuming nothing else changes, what happens to M1 and M2?
- (A) M1 falls by VD 2,000 and M2 falls by VD 2,000.
- (B) M1 falls by VD 2,000 and M2 does not change.
- (C) M1 does not change and M2 rises by VD 2,000.
- (D) M1 and M2 both stay the same.
Answer and explanation
Answer: (B). Demand deposits (in M1) fall by VD 2,000. Retail money market funds (in M2 but not M1) rise by VD 2,000. The money leaves M1 but stays inside M2.
- (A) forgets that retail money market funds are part of M2, so the money does not leave M2.
- (C) forgets that the money left a demand deposit, which is part of M1.
- (D) would be true only if the money moved between two items that are both in M1 (such as two checking accounts), or both in M2 but not M1 (such as a savings account and a time deposit).
Question 4 (multiple choice · core)
Which of the following is included in Valdoria’s monetary base but not in its M1?
- (A) Banknotes held in households’ wallets
- (B) Banknotes held in commercial banks’ vaults
- (C) Balances in firms’ checking accounts
- (D) Balances in households’ savings accounts
Answer and explanation
Answer: (B). Cash in bank vaults is part of bank reserves. Reserves are in the monetary base but are not currency in circulation, so they are not in M1.
- (A) is currency in circulation, which is in both the monetary base and M1.
- (C) is a demand deposit: in M1 but not in the monetary base.
- (D) is a savings deposit: in M2 only, and not in the monetary base.
Question 5 (calculation · core)
The table shows fictional data for Valdoria (VD billion).
| Item | VD billion |
|---|---|
| Currency in circulation | 64 |
| Checkable (demand) deposits | 176 |
| Savings deposits | 230 |
| Small time deposits | 95 |
| Retail money market funds | 55 |
| Large time deposits held by institutions | 120 |
| Bank reserves | 36 |
| Government bonds held by the public | 400 |
(a) Calculate M1, M2 and the monetary base. (b) Calculate the value of near-money (the part of M2 that is not in M1). (c) Households then move VD 20 billion from checking accounts into savings accounts. Calculate the new M1 and M2.
Worked solution and suggested Marlbridge rubric
(a) M1 = 64 + 176 = VD 240 billion. M2 = 240 + 230 + 95 + 55 = VD 620 billion. Monetary base = 64 + 36 = VD 100 billion. Large time deposits and government bonds are not in M1 or M2.
(b) Near-money = 620 − 240 = VD 380 billion (the savings deposits, small time deposits and retail money market funds: 230 + 95 + 55 = 380).
(c) Checkable deposits fall to 156; savings deposits rise to 250. New M1 = 64 + 156 = VD 220 billion. New M2 = VD 620 billion (unchanged: the money moved within M2).
| Point | What earns it |
|---|---|
| 1 | M1 = 240, with reserves left out |
| 1 | M2 = 620, with large time deposits and bonds left out (740 includes the large time deposits and earns no point) |
| 1 | Monetary base = 100 |
| 1 | New M1 = 220 and M2 unchanged at 620 |
Accept (b) as a check on (a); it earns no separate point. Accept values carried forward from an error in (a) for (c).
Question 6 (constructed response · core)
(a) Identify the function of money shown in each example. (i) A fisherman keeps VD 300 of his summer earnings to buy new nets in winter. (ii) A tailor accepts VD 40 from a customer for a shirt. (iii) A bakery’s accounts record that flour costs VD 120 a month and electricity VD 75 a month. (b) Without money, the tailor in (ii) wants rice but the customer has only vegetables. Explain the problem this creates and how money solves it. (c) Over the year that the fisherman in (i) holds his money, Valdoria’s price level rises by 8%. Calculate what the VD 300 is worth at the end of the year in start-of-year valdas. Explain what this shows about money as a store of value.
Model answer and suggested Marlbridge rubric
(a) (i) Store of value: the money holds purchasing power until winter. (ii) Medium of exchange: money is accepted in payment for the shirt. (iii) Unit of account: costs are recorded and compared in valdas.
(b) Barter needs a double coincidence of wants: the tailor must find someone who both has rice and wants a shirt, at the same time. This customer has vegetables, so no trade happens, or it happens only after more swaps. With money, the tailor sells the shirt to anyone for valdas and then uses the valdas to buy rice from any rice seller. Money separates the sale from the purchase.
(c) 300 ÷ 1.08 = VD 277.78 in start-of-year valdas, a loss of about VD 22.22 in purchasing power. Money stores value imperfectly: inflation reduces what each valda can buy. (Assets that pay interest may protect some of this value, which is why holding money has an opportunity cost.)
| Point | What earns it |
|---|---|
| 1 | All three functions correct in (a) |
| 1 | Identifies the double coincidence of wants problem in barter |
| 1 | Explains that money is generally accepted, so the tailor can sell to one person and buy from another |
| 1 | VD 277.78 (allow VD 277.8 or VD 278) |
| 1 | States that inflation reduces money’s purchasing power, so it is an imperfect store of value |
In (a), two out of three correct earns no point; the functions are often confused, so all three are needed.
Question 7 (constructed response · stretch)
At the start of a month, Valdoria’s M1 is VD 500 billion, its M2 is VD 1,200 billion and its monetary base is VD 180 billion. During the month, these three things happen, one after another.
(i) Firms deposit VD 4 billion of banknotes into their checking accounts. (ii) Households move VD 10 billion from checking accounts into retail money market funds. (iii) Households withdraw VD 6 billion in banknotes from their savings accounts.
(a) For each event, state the change in M1, M2 and the monetary base, with a reason. (b) Calculate M1, M2 and the monetary base at the end of the month. (c) During the month, households also buy VD 3 billion of goods with credit cards. A classmate says this “adds VD 3 billion of money to M1”. Explain why the classmate is wrong.
Model answer and suggested Marlbridge rubric
(a)
- (i) M1: no change (currency −4, demand deposits +4). M2: no change. Monetary base: no change (currency in circulation −4, bank reserves +4, because the notes are now in bank vaults).
- (ii) M1: −10 (demand deposits fall). M2: no change (money market funds are in M2). Monetary base: no change (no currency or reserves move).
- (iii) M1: +6 (currency rises; savings are not in M1). M2: no change (savings −6, currency +6). Monetary base: no change (currency +6, reserves −6, because banks pay out vault cash).
(b) M1 = 500 + 0 − 10 + 6 = VD 496 billion. M2 = VD 1,200 billion. Monetary base = VD 180 billion.
(c) A credit card is not money; it is a short-term loan from the card company. When the purchases are made, no currency or demand deposits are created, so M1 does not rise by VD 3 billion. The debt is paid later with money, usually by moving funds out of a demand deposit. Only that deposit counts in M1.
| Point | What earns it |
|---|---|
| 1 | (i) no change in any measure, with currency and deposits (or currency and reserves) offsetting |
| 1 | (ii) M1 −10 and M2 unchanged, with reason |
| 1 | (iii) M1 +6 and M2 unchanged, with reason |
| 1 | Final M1 = 496, with M2 = 1,200 and the base = 180 |
| 1 | Explains that a credit card is borrowing, paid later with money, so it is not in M1 |
Accept a final M1 carried forward from errors in (a). For the first three points the M1 and M2 effects are required; a missing monetary-base effect does not lose the point, but a wrong one does.
How did you do?
- Q1 or Q6(a) wrong: re-read “The three functions of money” in the study guide, especially “How to identify the function from an example”.
- Q2 or Q5 wrong: revisit “Measuring the money supply: M1 and M2” and Worked example 1.
- Q4 wrong: revisit “The monetary base” and Figure 1.
- Q3 or Q7(a)–(b) wrong: work through Worked example 2 again, asking which category the money leaves and which it enters.
- Q6(b)–(c) or Q7(c) wrong: revisit “What money is” and the note on money as an imperfect store of value.
Then tick off the topic checklist.