Question One [Total 14 marks]

1. a) Define M1 and M2 using the definition of money supply in Hong Kong. (4 marks)

2. b) Suppose you buy $300,000 ibonds from the Hong Kong government, in which $200,000 are financed by your cash, and $100,000 are paid by writing a cheque. Explain the impact on M1 and M2 using the definition of money supply in Hong Kong. (4 marks)

3. c) Explain in terms of the three functions of money, how cigarettes could be called "money" in prisoner-of-war camps of World War II.