- CFA Exams
- CFA Level I Exam
- Topic 2. Economics
- Learning Module 4. Monetary Policy
- Subject 1. Role of Central Banks
CFA Practice Question
Money is valuable since ______
A. people demand money but the supply is limited.
B. it is a legal tender, and it can buy valuable things.
C. it is backed up by gold or other commodities.
Explanation: People demand money but the supply of money is limited relative to the demand, thus making money valuable. The value of a unit of money is inversely related to the level of prices.
User Contributed Comments 12
| User | Comment |
|---|---|
| danlan | Fiat money (modern money) may not be backed up by gold or other commodities. |
| jmcarr02 | A 20$ bill worths 20$ only because I can buy 20$ of goods and services with it.. |
| nike | yes you can buy $20 of gas with a $20 bill. Suppose that's 8 gallons today. Tomorrow the government prints out lots of paper money. Then your $20 bill will be able to buy 2 gallons of gas (it's still $20 of gas). See the difference? It's the demand and supply of the money that determines the money is valuable. |
| myanmar | with hyperinflation, so when the government prints lots of money your 20 bucks today will be perhaps only 10 bucks tomorrow. so the power of supply and demand makes your money valuable. |
| monteleone | Look at money as a commodity. The more scarce it is, the more valuable it becomes. |
| jgraham6 | Money has no intrinsic value. It only has value because we place value on it. |
| 8thlegend | How is supply limited when the Feds can print as much money as they want? |
| leftcoast | 8thlegend - The amount of money is limited by inflation. Too much money in the system can possibly create unsustainable inflation. Therefore supply is in fact limited. |
| GBolt93 | I agree that supply and demand determines the value of money, but isn't it also true that it's only valuable because it's legal tender that you can exchange for things with intrinsic value? So it would have no value/demand if it wasn't exchangeable for real goods. |
| LoweJoseph | The hell with this question |
| dbalakos | People demand money because it is legal tender and thus valuable, but its relative value is determined by supply |
| atlootah | itcoin |