Self-Check Questions

network of banks making loans, people making deposits, and banks making more loans creates much of the money in an economy. Given the macroeconomic dangers of a malfunctioning banking system, Monetary Policy and Bank Regulation will discuss government policies for controlling the money supply and for keeping the banking system safe.

Self-Check Questions

1 . In many casinos, a person buys chips to use for gambling. Within the casino's walls, customers often can use these chips to buy food and drink or even a hotel room. Do chips in a gambling casino serve all three functions of money? 2 . Can you name some item that is a store of value, but does not serve the other functions of money? 3 . If you are out shopping for clothes and books, what is easiest and most convenient for you to spend: M1 or M2? Explain your answer. 4 . For the following list of items, indicate if they are in M1, M2, or neither: a. Your $5,000 line of credit on your Bank of America card b. $50 dollars’ worth of traveler’s checks you have not used yet c. $1 in quarters in your pocket d. $1200 in your checking account e. $2000 you have in a money market account 5 . Explain why the money listed under assets on a bank balance sheet may not actually be in the bank? 6 . Imagine that you are in the position of buying loans in the secondary market (that is, buying the right to collect the payments on loans) for a bank or other financial services company. Explain why you would be willing to pay more or less for a given loan if: a. The borrower has been late on a number of loan payments b. Interest rates in the economy as a whole have risen since the bank made the loan c. The borrower is a firm that has just declared a high level of profits d. Interest rates in the economy as a whole have fallen since the bank made the loan

Review Questions

7 . What are the four functions that money serves? 8 . How does the existence of money simplify the process of buying and selling? 9 . What is the double-coincidence of wants? 10 . What components of money do we count as part of M1? 11 . What components of money do we count in M2? 12 . Why do we call a bank a financial intermediary? 13 . What does a balance sheet show? 14 . What are a bank's assets? What are its liabilities? 15 . How do you calculate a bank's net worth? 16 . How can a bank end up with negative net worth? 17 . What is the asset-liability time mismatch that all banks face? 18 . What is the risk if a bank does not diversify its loans?