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CHAPTER 28: THE FINANCIAL SECTOR AND THE
ECONOMY
Questions and Exercises
1. Money doesn't have to have any inherent value to function as a medium of
2. Money functions as a medium of exchange, a unit of value, and a store of wealth.
3. a. Money: Funds held in a checking account is considered money.
b. Not money: Foreign currencies are not accepted in exchange for other goods so
4. Money serves as a unit of account when people compare prices.
5. Inflation reduces money’s function as a store of wealth because it reduces how
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© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
6. There are three components of M2 that are not components of M1:
7. a. Neither
8. a. Nothing happens to M2. M1 declines by $150
9. Banks earn revenue by lending the money out of their deposits. They can do so
because at any specific day only a fraction of their deposits are withdrawn and
10. If individuals hold no cash, the money multiplier is the reciprocal of the reserve
requirement. Thus for the following reserve requirements the money multiplier is
found by dividing the requirement percentage into 1:
5 percent: (1/0.05) = 20
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© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
11. If the U.S. government were to raise the reserve requirement to 100 percent, the
12. For a deposit of $100 and a reserve ratio of 5 percent:
a. The bank can initially lend out $100 – (0.05 × 100) = $95.
13. False. Policy makers do not use the money multiplier to determine the amount of
reserves needed to achieve the desired money supply because people hold cash
14. Although financial institutions don't produce any tangible real assets, they are
15. Two roles are to facilitate trade and transfer saving back into spending.
16. a. Expanding spending too quickly might create inflation
17. a. Transactions motive
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© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18. People will increase the amount of money they hold, and sell bonds, if they expect
Questions from Alternative Perspectives
1. Austrian
a. Yes, money could be privately supplied. Economists disagree as to whether the
b. Yes, money has been supplied privately. (See the work of Lawrence White and his
2. Feminist
a. Since its inception only a very small percentage of the governors have been women.
b. Currently, (as of 2017) about all that one can say about the current members is that
3. Institutionalist
Two examples include judging the value of someone by the clothes they wear: "Did
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© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
4. Post-Keynesian
a. Post-Keynesians believe that the money supply is much more endogenous than is
b. Post-Keynesians see the money supply being determined by the supply and demand
5. Religious
a. In profit sharing the lender has a stronger stake in the business, and the payment he
b. In an interest paying system, a failed business could be forced to pay back the debt
Issues to Ponder
1. Money is to the economy as oil is to an engine because money is a financial asset
2. To be considered money, the currencies would have to fulfill the functions of
3. a. No, because they are hard to move. In this case, pearl shells were used for small
b. It would lower the value of the stones, causing a general inflation in prices.
c. If they could be distinguished, which in this case they could, the new stones
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© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
d. It depends, in some ways money is a marker of individuals’ “gifts to the
4. a. As more counterfeit money is printed and not identified as counterfeit, the value
b. As businesses become suspicious of currency that is circulated, they will favor
c. As counterfeiting increases, the U.S. Treasury will likely spend more to introduce
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© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
