CHAPTER 13
MONEY AND THE FINANCIAL SYSTEM
SOLUTIONS TO END OF CHAPTER PROBLEMS
1. Money fulfills three important functions: a medium of exchange, a unit of account, and a
store of value.
3. Goldsmiths accepted deposits of gold from their customers, which were available to the
depositors upon request. Since the amount of idle gold on deposit tended to remain relatively
4.
a. commodity money
5. Fiat money is typically made from inexpensive materials, such as paper or common metals,
and is not intrinsically useful or valuable. It is token money—it is not backed by a promise to
6. When new gold was discovered, the increased supply would cause the price of gold to fall
(i.e., the supply curve would shift to the right). As a result, money, whose value depended on
7. Depository institutions are financial institutions that obtain funds mainly by accepting
deposits from the public—both businesses and households. The various types in the United
8. A bank can make loans based on customer deposits. These loans, in effect, become money.
The bank has created a deposit for the borrower. Thus, the total claims against the bank now
9. The Fed has the power to issue currency, buy and sell government securities, provide loans to
member banks (at a rate termed the discount rate), clear checks between banks, and require
10. Subprime mortgages are loans to home-buyers with not-so-good credit ratings. Prior to the
financial crisis of 2008, hundreds of subprime mortgages would be bundled together and sold
as a mortgage-backed security. The feeling at the time was that housing prices would continue
11. Economists argue that the combination of deregulation and deposit insurance encouraged
some banks on the verge of failing to take bigger risks—to “bet the bank”—because their