The internal value of money refers to its purchasing power. The central bank can use a variety of tools to maintain the internal value of money, including:
- Monetary policy: The central bank can use monetary policy tools such as interest rates and open market operations to influence the supply of money in the economy. This can help to keep inflation under control.
- Foreign exchange intervention: The central bank can intervene in the foreign exchange market to buy or sell currency. This can help to stabilize the exchange rate, which can also help to keep inflation under control.
- Banking supervision: The central bank can supervise the banking system to ensure that banks are sound and well-managed. This can help to prevent financial crises, which can lead to inflation.
- Financial education: The central bank can promote financial education to help people understand the importance of money and how to manage it wisely. This can help to prevent inflation by encouraging people to save money and invest wisely.
Multiple Choice Questions
- Which of the following is not a tool that a central bank can use to maintain the internal value of money?
- Monetary policy
- Foreign exchange intervention
- Banking supervision
- Financial education
- Answer: Financial education
- The central bank uses monetary policy to influence the supply of money in the economy. What does this mean for inflation?
- A higher supply of money can lead to higher inflation.
- A lower supply of money can lead to higher inflation.
- A higher supply of money can lead to lower inflation.
- A lower supply of money can lead to lower inflation.
- Answer: A higher supply of money can lead to higher inflation.
- The central bank intervenes in the foreign exchange market by:
- Buying or selling currency
- Setting interest rates
- Changing reserve requirements
- All of the above
- Answer: Buying or selling currency
Answers
- The answer is Financial education. Financial education is not a tool that a central bank can use to maintain the internal value of money.
- The answer is A higher supply of money can lead to higher inflation. When there is more money in the economy, people have more money to spend. This can lead to higher prices, which is inflation.
- The answer is Buying or selling currency. When the central bank buys or sells currency, it affects the supply of currency in the market. This can affect the exchange rate, which can also affect inflation.