PRC-3 · Chapter 17
Money MCQs with Answers
20 multiple-choice questions on Money for PRC-3 Business & Economic Insights. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Before the invention of money, people used the barter system. However, for a barter trade to occur, person A must want exactly what person B has, and person B must want exactly what person A has. This massive hurdle is known as the:
- A) Illusion of wealth
- B) Double coincidence of wants
- C) Paradox of value
- D) Liquidity trap
Show answer & explanation
Answer: B) Double coincidence of wants
The double coincidence of wants is the primary flaw of the barter system, making trade extremely difficult without a universally accepted medium of exchange (money).
Question 2
A shopkeeper prices a loaf of bread at Rs. 100, a bottle of milk at Rs. 150, and a dozen eggs at Rs. 200. By expressing the value of wildly different items in a single standard metric, money is performing which core function?
- A) Store of value
- B) Standard of deferred payment
- C) Unit of account (measure of value)
- D) Medium of exchange
Show answer & explanation
Answer: C) Unit of account (measure of value)
Money acts as a unit of account, providing a common denominator to price and compare the relative value of entirely different goods and services.
Question 3
Modern paper currency has no intrinsic value (it is just printed paper), yet everyone accepts it because the government has officially declared it to be valid for settling all debts. This type of money is known as:
- A) Commodity money
- B) Fiat money
- C) Representative money
- D) Bank money
Show answer & explanation
Answer: B) Fiat money
Fiat money is currency that lacks intrinsic value but is established as money by government decree or law (legal tender).
Question 4
According to Keynesian Liquidity Preference theory, an investor decides to hold physical cash rather than buying bonds because he believes bond prices are currently too high and will soon crash. Which motive for holding money is this?
- A) Transactions motive
- B) Precautionary motive
- C) Inflationary motive
- D) Speculative motive
Show answer & explanation
Answer: D) Speculative motive
The speculative motive involves holding cash to take advantage of future changes in the prices of financial assets (like bonds) or interest rates.
Question 5
A country is suffering from hyperinflation, with prices doubling every week. People rush to spend their salaries the exact minute they receive them, refusing to save cash. Which function of money is completely destroyed by this hyperinflation?
- A) Medium of exchange
- B) Store of value
- C) Unit of account
- D) Double coincidence of wants
Show answer & explanation
Answer: B) Store of value
Money serves as a store of value by retaining its purchasing power over time. Hyperinflation rapidly destroys this purchasing power, ruining money's ability to store value.
Question 6
Before money existed, a farmer trading wheat for a cow had to find a cow owner who specifically wanted wheat. This massive limitation of the barter system is known as the:
- A) Double coincidence of wants
- B) Divisibility problem
- C) Speculative motive
- D) Paradox of value
Show answer & explanation
Answer: A) Double coincidence of wants
The double coincidence of wants requires two parties to each possess exactly what the other desires, making barter trade incredibly difficult without money.
Question 7
A supermarket prices a loaf of bread at Rs. 100 and a bottle of milk at Rs. 150. By allowing completely different goods to be valued using a single, common denominator, money is performing its function as a:
- A) Store of value
- B) Medium of exchange
- C) Unit of account (measure of value)
- D) Standard of deferred payment
Show answer & explanation
Answer: C) Unit of account (measure of value)
Money acts as a unit of account, providing a universal standard metric to price, value, and compare all economic goods and services.
Question 8
Modern paper currency has no actual intrinsic value. People only accept it because the government has passed a law declaring it to be valid for settling debts. This type of currency is called:
- A) Commodity money
- B) Fiat money
- C) Representative money
- D) Intrinsic money
Show answer & explanation
Answer: B) Fiat money
Fiat money is currency that lacks intrinsic value but is established as legal tender by government decree.
Question 9
According to Keynesian theory, an investor chooses to hold physical cash in a safe instead of buying bonds because they predict bond prices will soon crash. This is an example of the:
- A) Transactions motive
- B) Precautionary motive
- C) Speculative motive
- D) Inflationary motive
Show answer & explanation
Answer: C) Speculative motive
The speculative motive involves holding liquid cash to take advantage of future changes in the prices of financial assets or interest rates.
Question 10
During a period of extreme hyperinflation, people rush to spend their money the exact second they get paid, refusing to save any of it. Which critical function of money is completely destroyed here?
- A) Medium of exchange
- B) Unit of account
- C) Standard of deferred payment
- D) Store of value
Show answer & explanation
Answer: D) Store of value
Money serves as a store of value. Hyperinflation rapidly destroys money's purchasing power, meaning it can no longer reliably store wealth over time.
Question 11
A shopkeeper prices a loaf of bread at Rs. 100 and a dozen eggs at Rs. 200. By providing a common denominator to value completely different items, money is fulfilling its function as a:
- A) Medium of exchange
- B) Store of value
- C) Standard of deferred payment
- D) Unit of account (measure of value)
Show answer & explanation
Answer: D) Unit of account (measure of value)
Money acts as a unit of account, allowing the relative value of entirely different goods to be easily measured and compared.
Question 12
Before money, people used the barter system. However, a farmer trading wheat for a cow had to find someone who had a cow AND wanted wheat. This massive limitation is known as the:
- A) Double coincidence of wants
- B) Paradox of value
- C) Liquidity trap
- D) Divisibility problem
Show answer & explanation
Answer: A) Double coincidence of wants
The double coincidence of wants is the core flaw of barter, requiring two parties to perfectly desire each other's specific goods simultaneously.
Question 13
Modern paper currency has no actual intrinsic value (it is just printed paper), but everyone accepts it because the government declares it legal tender. This type of money is:
- A) Commodity money
- B) Representative money
- C) Fiat money
- D) Intrinsic money
Show answer & explanation
Answer: C) Fiat money
Fiat money is currency that lacks intrinsic physical value but holds purchasing power by government decree and law.
Question 14
During a period of massive hyperinflation, people rush to spend their salaries the exact second they are paid, refusing to save cash in a bank. Which function of money is totally destroyed here?
- A) Medium of exchange
- B) Unit of account
- C) Store of value
- D) Standard of deferred payment
Show answer & explanation
Answer: C) Store of value
Money serves as a store of value. Hyperinflation rapidly destroys its purchasing power, meaning cash can no longer reliably store wealth over time.
Question 15
According to Keynesian Liquidity Preference theory, an investor chooses to hold physical cash instead of buying bonds because he predicts bond prices will soon crash. This is the:
- A) Precautionary motive
- B) Speculative motive
- C) Transactions motive
- D) Inflationary motive
Show answer & explanation
Answer: B) Speculative motive
The speculative motive involves holding liquid cash to take advantage of future changes in the prices of financial assets or interest rates.
Question 16
A family keeps Rs. 50,000 locked in a safe specifically in case a sudden medical emergency occurs. According to Keynes, this cash is held due to the:
- A) Transactions motive
- B) Speculative motive
- C) Precautionary motive
- D) Deflationary motive
Show answer & explanation
Answer: C) Precautionary motive
The precautionary motive is holding money to protect against sudden, unforeseen expenses and emergencies.
Question 17
When a company signs a contract today to buy supplies but promises to pay Rs. 1 million in exactly six months, money is performing its function as a:
- A) Store of value
- B) Medium of exchange
- C) Standard of deferred payment
- D) Speculative asset
Show answer & explanation
Answer: C) Standard of deferred payment
Money allows contracts and debts to be negotiated now and settled in the future, acting as a standard for deferred payments.
Question 18
Which of the following functions is primarily performed by a Commercial Bank rather than a Central Bank?
- A) Issuing the national paper currency
- B) Receiving deposits directly from the general public and granting commercial loans
- C) Setting the national benchmark interest rate
- D) Acting as the lender of last resort to the government
Show answer & explanation
Answer: B) Receiving deposits directly from the general public and granting commercial loans
Commercial banks interact directly with the public to accept deposits and create credit. The Central Bank manages the national currency and regulates the banking system.
Question 19
Commercial banks utilize a system where they keep only a small fraction of public deposits in their vaults and lend the rest out, creating new money in the economy. This process is called:
- A) Open market operations
- B) Fiat currency printing
- C) Credit creation (The money multiplier)
- D) Liquidity trapping
Show answer & explanation
Answer: C) Credit creation (The money multiplier)
Through fractional reserve banking, commercial banks lend out deposited money, which gets redeposited and lent out again, mathematically multiplying the money supply.
Question 20
Which of the following actions by a government would lead to an immediate and direct reduction in the broad money supply?
- A) Increasing the interest rates offered on National Savings certificates
- B) Lowering the central bank reserve ratio
- C) Dropping the income tax rate
- D) Printing more fiat money
Show answer & explanation
Answer: A) Increasing the interest rates offered on National Savings certificates
If the government offers high interest on savings schemes, the public withdraws cash from commercial circulation to lock it in state savings, reducing the broad money supply.