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.

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

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?