Chapter Questions
"How much money did you make last year?" What is wrong with that statement?
Suppose the value of the dollar declines relative to other currencies. How does the decline affect the three functions of money?
Does inflation, which is an increase in the price level, affect the three functions of money? If so, how?
"People in a barter economy came up with the idea of money because they wanted to do something to make society better off." Do you agree or disagree with this statement? Explain your answer.
"A barter economy would have very few comedians." Do you agree or disagree with this statement? Explain your answer.
Money makes trade easier. Would having a money supply twice as large as it currently is make trade twice as easy? Would having a money supply half its current size make trade half as easy?
Explain why gold backing is not necessary to give paper money value.
"Money is a means of lowering the transaction costs of making exchanges." Do you agree or disagree? Explain your answer.
If you were on an island with 10 other people and there were no money, do you think that money would emerge on the scene? Why or why not?
Can M1 fall as M2 rises? Can M1 rise without M2 rising too? Explain your answers.
Why isn't a credit card money?
Define the following:a. Time depositb. Money market mutual fundc. Money market deposit accountd. Fractional reserve bankinge. Reserves
Explain the process by which goldsmiths could increase the money supply.
What is a financial system, and why would a country with a well-developed and fully functionally financial system be better off than a country without it?
Identify each of the following as either an adverse selection problem or a moral hazard problem:a. Poor drivers apply for car insurance more than good drivers do.b. The federal government promises to help banks that get into financial problems.c. The federal government insures checkable deposits (promises to repay the holder of the checkable deposit if the bank fails).
Explain how financial intermediaries help to solve adverse selection problems and moral hazard problems when it comes to lending and borrowing.
Explain the difference between a bank's loans and its borrowings.