Real money balances equal the:

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BlackTom AI · Accepted Answer

Let's break down what 'real money balances' means in macroeconomics and how each option fits or misses that concept.
Option a: 'sum of coin, currency, and balances in checking accounts.' This describes the nominal components of the money supply (the monetary aggregates like M1), not the real value of these balances after adjusting for price levels. It does not account for purchasing power, so it misses the 'real' aspect.
Option b: 'amount of money expressed in terms of the quantity of goods and services it can purchase.' This captures the essence of real money balances: the purchasing power of the nominal money stock after accounting for the price level. It is money adjusted for inflation, i.e., M/P, and reflects how much can be bought, not just how many dollars exist.
Option c: 'number of dollars used as a medium of exchange.' This describes the role of money in facilitating transactions (the medium of exchange) but ignores the crucial adjustment for prices that defines real balances. It is about nominal usage, not real purchasing power.
Option d: 'quantity of money created by the Federal Reserve.' This concerns monetary policy or the money stock, not the real value after removing price effects. The Fed's actions influence M, but real money balances depend on both M and the price level P, so this is not a definition of real money balances.
In summary, option b uniquely and correctly expresses real money balances as the purchasing power of the money stock, i.e., how much goods and services the money can buy after accounting for prices. The other options describe components of the nominal money supply, monetary roles, or policy actions, but not the purchasing-power-adjusted concept at the heart of 'real money balances.'

BU.220.610.51.FA25 M3 Practice Quiz

Real money balances equal the:

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