Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
34-677
CHAPTER 34
Money, Banking, and Financial Institutions
A. Short-Answer, Essays, and Problems
1. What is money? Explain in terms of the functions of money.
2. What are the three functions that a commodity must fulfill to be useful as money?
3. Why can’t food be used as a form of money?
4. Money is what money does. Explain.
5. Define asset liquidity. Provide an example of a highly liquid and highly illiquid asset.
6. What is a key advantage of money over other financial assets such as stocks, bonds, precious metals or real
estate?
7. Some government bonds can be redeemed for currency or a check at banks. Why, then, isn’t it universally
agreed that government bonds are money?
8. What are the two major components of the M1 money supply?
9. Discuss the overall level and compare the components of M1 and M2 in February of 2016. Which were the
10. Why are modern coins not made of precious metals?
11. How is a commercial bank different from a savings and loan association?
12. Are currency and checkable deposits owned by the government (U.S. Treasury) and the Federal Reserve
13. What is the difference between the M1 and M2 definitions of the money supply?
14. Use the figures in the table below to answer the following questions.
Billions
Small time deposits
Money-market mutual funds held by
businesses
Savings deposits, including money-
market deposit accounts
Money-market mutual funds held by
individuals
Checkable deposits
Currency
$1014
1190
3649
744
633
743
(a) What is the value of M1?
(b) What is the value of M2?
34-678
15. Use the figures in the table below to answer the following questions.
Billions
Small time deposits
Money-market mutual funds held by
businesses
Savings deposits, including money-
market deposit accounts
Money-market mutual funds held by
individuals
Checkable deposits
Currency
$1260
1290
1750
850
896
340
(a) What is the value of M1?
(b) What is the value of M2?
16. Use the figures in the table below to answer the following questions.
Billions
Small time deposits
Money-market mutual funds held by
businesses
Savings deposits, including money-
market deposit accounts
Money-market mutual funds held by
individuals
Checkable deposits
Currency
$1250
1300
1620
905
836
325
(a) What is the value of M1?
(b) What is the value of M2?
19. Why is money considered to be debt?
20. Why don’t economists agree with backing paper money with a certain commodity, such as gold?
21. Discuss three major points about what gives money its value.
22. What does it mean that a currency has been designated legal tender? How important is the designation?
24. Complete the table showing the relationship between a percentage change in the price level and the
percentage change in the value of money. Calculate the percentage change in money to one decimal place.
Change in price level
Change in value
of money
a. rises by:
8%
16%
24%
b. falls by:
8%
16%
− _____.___%
− _____.___
− _____.___
+ _____.___
+ _____.___
34-679
24%
+ _____.___
25. How do high rates of inflation affect the acceptability of a nation’s currency?
27. What issues in U.S. banking precipitated the creation of the Federal Reserve System in 1913?
29. What responsibilities do the U.S. President and U.S. Senate have regarding the members of the Board of
Governors of the Federal Reserve System?
30. How do long terms for appointments benefit the Federal Reserve’s Board of Governors?
31. What are the three major characteristics of the twelve Federal Reserve Banks?
32. How do the 12 Federal Reserve Banks operate as a central bank?
33. In what way are the 12 Federal Reserve Banks considered “quasi-banks”?
35. Who sits on the Federal Open Market Committee (FOMC)?
36. What is the main purpose of the Federal Open Market Committee (FOMC)?
37. What are the seven functions of the Federal Reserve System? Which one is most important?
38. Is the Federal Reserve an independent institution?
39. Why did the U.S. Congress establish the Federal Reserve as an independent agency?
40. What three factors led to the mortgage default crisis?
41. How did mortgage defaults affect banks involved in mortgage lending and mortgage investing?
42. What is meant by the term securitization? How did mortgage-backed securities spread losses during the
mortgage default crisis?
43. What is TARP? How does it illustrate the problem of moral hazard?
44. What did the Federal Reserve do during the financial crisis of 2008 and 2009?
45. Besides banks and thrifts, what other types of financial services firms exist and what do they do?
46. How did the recent financial crisis affect the financial services industry?
47. What are six major provisions of the Wall Street Reform and Consumer Protection Act?
34-680
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw-Hill Education.
48. (Last Word) What is meant by a solvent firm? Is it possible to have a firm that is solvent, but at risk of
bankruptcy.
49. (Last Word) Evaluate the moral hazard problem going forward after policies that were put in place during
the Great Recession.
B. Answers to Short-Answer, Essays, and Problems
1. What is money? Explain in terms of the functions of money.
2. What are the three functions that a commodity must fulfill to be useful as money?
3. Why can’t food be used as a form of money?
4. Money is what money does. Explain.
This refers to the idea that money (at least paper money and checks) has no intrinsic value. It is valuable
only in terms of its acceptability in exchange for goods and services. In other words, it is valuable only in
5. Define asset liquidity. Provide an example of a highly liquid and highly illiquid asset.
6. What is a key advantage of money over other financial assets such as stocks, bonds, precious metals or real
estate?
7. Some government bonds can be redeemed for currency or a check at banks. Why, then, isn’t it universally
agreed that government bonds are money?
8. What are the two major components of the M1 money supply?
9. Discuss the overall level and compare the components of M1 and M2 in February of 2016. Which were the
largest pieces of each.
10. Why are modern coins not made of precious metals?
11. How is a commercial bank different from a savings and loan association?
12. Are currency and checkable deposits owned by the government (U.S. Treasury) and the Federal Reserve
Bank, commercial banks, and other financial institutions part of the money supply? Explain.
13. What is the difference between the M1 and M2 definitions of the money supply?
34-683
34-684
14. Use the figures in the table below to answer the following questions.
Billions
Small time deposits
Money-market mutual funds held by
businesses
Savings deposits, including money-
market deposit accounts
Money-market mutual funds held by
individuals
Checkable deposits
Currency
$1014
1190
3649
744
633
743
(a) What is the value of M1?
(b) What is the value of M2?
15. Use the figures in the table below to answer the following questions.
Billions
Small time deposits
Money-market mutual funds held by
businesses
Savings deposits, including money-
market deposit accounts
Money-market mutual funds held by
individuals
Checkable deposits
Currency
$1260
1290
1750
850
896
340
(a) What is the value of M1?
(b) What is the value of M2?
16. Use the figures in the table below to answer the following questions.
Billions
Small time deposits
Money-market mutual funds held by
businesses
Savings deposits, including money-
market deposit accounts
Money-market mutual funds held by
individuals
Checkable deposits
Currency
$1250
1300
1620
905
836
325
(a) What is the value of M1?
(b) What is the value of M2?
17. Explain the difference between a money-market deposit account and a money-market mutual fund.
18. (Consider This) Are credit cards money? Explain.
19. Why is money considered to be debt?
20. Why don’t economists agree with backing paper money with a certain commodity, such as gold?
21. Discuss three major points about what gives money its value.
22. What does it mean that a currency has been designated legal tender? How important is the designation?
23. State the formula for the relationship between the purchasing power of the U.S. dollar and the price level.
The purchasing power of the U.S. dollar is inversely related to the price level: Value of the dollar ($V) = 1
24. Complete the table showing the relationship between a percentage change in the price level and the
percentage change in the value of money. Calculate the percentage change of money to one decimal place.
Change in price level
Change in value
of money
a. rises by:
8%
16%
24%
b. falls by:
8%
16%
24%
− _____.___%
− _____.___
− _____.___
+ _____.___
+ _____.___
+ _____.___
Change in price level
Change in value
of money
a. rises by:
8%
16%
24%
b. falls by:
8%
16%
24%
−7.4%
−13.7%
−19.4%
+8.7%
+19.0%
+31.5%
25. How do high rates of inflation affect the acceptability of a nation’s currency?
26. Explain what policies are used to stabilize the value of money.
27. What issues in U.S. banking precipitated the creation of the Federal Reserve System in 1913?
34-687
28. Describe the three major units of the Federal Reserve System and their functions.
29. What responsibilities do the U.S. President and U.S. Senate have regarding the members of the Board of
Governors of the Federal Reserve System?
30. How do long terms for appointments benefit the Federal Reserve’s Board of Governors?
31. What are the three major characteristics of the twelve Federal Reserve Banks?
32. How do the 12 Federal Reserve Banks operate as a central bank?
33. In what way are the 12 Federal Reserve Banks considered “quasi-banks”?
34. The Federal Reserve Banks are bankers’ banks. Explain.
35. Who sits on the Federal Open Market Committee (FOMC)?
36. What is the main purpose of the Federal Open Market Committee (FOMC)?
37. What are the seven functions of the Federal Reserve System? Which one is most important?
38. Is the Federal Reserve an independent institution?
39. Why did the U.S. Congress establish the Federal Reserve as an independent agency?
40. What three factors led to the mortgage default crisis?
41. How did mortgage defaults affect banks involved in mortgage lending and mortgage investing?
42. What is meant by the term securitization? How did mortgage-backed securities spread losses during the
mortgage default crisis?
43. What is TARP? How does it illustrate the problem of moral hazard?
44. What did the Federal Reserve do during the financial crisis of 2008 and 2009?
45. Besides banks and thrifts, what other types of financial services firms exist and what do they do?
46. How did the financial crisis of 2007 and 2008 affect the financial services industry?
34-690
47. What are six major provisions of the Wall Street Reform and Consumer Protection Act?
48. (Last Word) What is meant by a solvent firm? Is it possible to have a firm that is solvent, but at risk of
49. (Last Word) Evaluate the moral hazard problem going forward after policies that were put in place during
the Great Recession.
