Chapter 14 – Money, Banking, and Financial Institutions
14-1
CHAPTER 14
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. Why are modern coins not made of precious metals?
10. How is a commercial bank different from a savings and loan association?
11. 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.
12. What is the difference between the M1 and M2 definitions of the money supply?
13. 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?
Chapter 14 – Money, Banking, and Financial Institutions
14-2
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
$1260
1290
1750
850
896
340
(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
$1250
1300
1620
905
836
325
(a) What is the value of M1?
(b) What is the value of M2?
16. Explain the difference between a money–market deposit account and a money-market mutual fund.
17. (Consider This) Are credit cards money? Explain.
18. Why is money considered to be debt?
19. Why don’t economists agree with backing paper money with a certain commodity, such as gold?
20. Discuss three major points about what gives money its value.
21. State the formula for the relationship between the purchasing power of the U.S. dollar and the price level.
22. Complete the following 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 the value 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%
− _____.___%
− _____.___
− _____.___
+ _____.___
+ _____.___
Chapter 14 – Money, Banking, and Financial Institutions
14-3
24%
+ _____.___
23. How do high rates of inflation affect the acceptability of a nation’s currency?
24. Explain what policies are used to stabilize the value of money.
25. What issues in U.S. banking precipitated the creation of the Federal Reserve System in 1913?
26. Describe the three major units of the Federal Reserve System and their functions.
27. 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?
28. How do long terms for appointments benefit the Federal Reserve’s Board of Governors?
29. What are the three major characteristics of the twelve Federal Reserve Banks?
30. How do the 12 Federal Reserve Banks operate as a central bank?
31. In what way are the 12 Federal Reserve Banks considered “quasi–banks”?
32. The Federal Reserve Banks are bankers’ banks. Explain.
33. Who sits on the Federal Open Market Committee (FOMC)?
34. What is the main purpose of the Federal Open Market Committee (FOMC)?
35. What are the seven functions of the Federal Reserve System? Which one is most important?
36. Is the Federal Reserve an independent institution?
37. Why did the U.S. Congress establish the Federal Reserve as an independent agency?
38. What three factors led to the mortgage default crisis?
39. How did mortgage defaults affect banks involved in mortgage lending and mortgage investing?
40. What is meant by the term securitization? How did mortgage-backed securities spread losses during the
mortgage default crisis?
41. What is TARP? How does it illustrate the problem of moral hazard?
42. What did the Federal Reserve do during the financial crisis of 2008 and 2009?
43. Besides banks and thrifts, what other types of financial services firms exist and what do they do?
44. How did the recent financial crisis affect the financial services industry?
45. What are six major provisions of the Wall Street Reform and Consumer Protection Act?
46. (Last Word) How has the character of money changed with new technology?
47. (Last Word) “Money will always be a physical entity.” Evaluate this statement.
Chapter 14 – Money, Banking, and Financial Institutions
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.
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?
Chapter 14 – Money, Banking, and Financial Institutions
8. What are the two major components of the M1 money supply?
9. Why are modern coins not made of precious metals?
10. How is a commercial bank different from a savings and loan association?
11. 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.
12. What is the difference between the M1 and M2 definitions of the money supply?
Chapter 14 – Money, Banking, and Financial Institutions
14-6
13. 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?
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
$1260
1290
1750
850
896
340
(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
$1250
1300
1620
905
836
325
(a) What is the value of M1?
(b) What is the value of M2?
Chapter 14 – Money, Banking, and Financial Institutions
14-7
16. Explain the difference between a money-market deposit account and a money-market mutual fund.
17. (Consider This) Are credit cards money? Explain.
18. Why is money considered to be debt?
19. Why don’t economists agree with backing paper money with a certain commodity, such as gold?
20. Discuss three major points about what gives money its value.
21. State the formula for the relationship between the purchasing power of the U.S. dollar and the price level.
Chapter 14 – Money, Banking, and Financial Institutions
22. Complete the following 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 the value 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
of money
23. How do high rates of inflation affect the acceptability of a nation’s currency?
24. Explain what policies are used to stabilize the value of money.
25. What issues in U.S. banking precipitated the creation of the Federal Reserve System in 1913?
Chapter 14 – Money, Banking, and Financial Institutions
14-9
26. Describe the three major units of the Federal Reserve System and their functions.
27. 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?
28. How do long terms for appointments benefit the Federal Reserve’s Board of Governors?
29. What are the three major characteristics of the twelve Federal Reserve Banks?
30. How do the 12 Federal Reserve Banks operate as a central bank?
31. In what way are the 12 Federal Reserve Banks considered “quasi–banks”?
32. The Federal Reserve Banks are bankers’ banks. Explain.
Chapter 14 – Money, Banking, and Financial Institutions
14–10
33. Who sits on the Federal Open Market Committee (FOMC)?
34. What is the main purpose of the Federal Open Market Committee (FOMC)?
35. What are the seven functions of the Federal Reserve System? Which one is most important?
36. Is the Federal Reserve an independent institution?
37. Why did the U.S. Congress establish the Federal Reserve as an independent agency?
38. What three factors led to the mortgage default crisis?
39. How did mortgage defaults affect banks involved in mortgage lending and mortgage investing?
Chapter 14 – Money, Banking, and Financial Institutions
40. What is meant by the term securitization? How did mortgage-backed securities spread losses during the
mortgage default crisis?
41. What is TARP? How does it illustrate the problem of moral hazard?
42. What did the Federal Reserve do during the financial crisis of 2008 and 2009?
43. Besides banks and thrifts, what other types of financial services firms exist and what do they do?
44. How did the recent financial crisis affect the financial services industry?
Chapter 14 – Money, Banking, and Financial Institutions
14–12
45. What are six major provisions of the Wall Street Reform and Consumer Protection Act?
46. (Last Word) How has the character of money changed with new technology?
47. (Last Word) “Money will always be a physical entity.” Evaluate this statement.