Content check — Economics, Chapter 27: Money and Banking

Every problem in the chapter beside the book’s answer, a chapter at a time as you scroll.

Chapter 27: Money and Banking

6 problems · 0 figures

In many casinos, a person buys chips to use for gambling. Within the casino's walls, customers often can use these chips to buy food and drink or even a hotel room. Do chips in a gambling casino serve all three functions of money?

Answer

As long as you remain within the walls of the casino, chips fit the definition of money; that is, they serve as a medium of exchange, a unit of account, and a store of value. Chips do not work very well as money once you leave the casino, but many kinds of money do not work well in other areas. For example, it is hard to spend money from Turkey or Brazil at your local supermarket or at the movie theater.

27-2 §27.1 source ↗

Can you name some item that is a store of value, but does not serve the other functions of money?

Answer

Many physical items that a person buys at one time but may sell at another time can serve as an answer to this question. Examples include a house, land, art, rare coins or stamps, and so on.

27-3 §27.2 source ↗

If you are out shopping for clothes and books, what is easiest and most convenient for you to spend: M1 or M2? Explain your answer.

Answer

The currency and checks in M1 are easiest to spend. It is harder to spend M2 directly, although if there is an automatic teller machine in the shopping mall, you can turn M2 from your savings account into an M1 of currency quite quickly. If your answer is about “credit cards,” then you are really talking about spending M1—although it is M1 from the account of the credit card company, which you will repay later when you credit card bill comes due.

27-4 §27.2 source ↗

For the following list of items, indicate if they are in M1, M2, or neither:

a. Your $5,000 line of credit on your Bank of America card

b. $50 dollars’ worth of traveler’s checks you have not used yet

c. $1 in quarters in your pocket

d. $1200 in your checking account

e. $2000 you have in a money market account

Answer

a. Neither in M1 or M2

b. That is part of M1, and because M2 includes M1 it is also part of M2

c. Currency out in the public hands is part of M1 and M2

d. Checking deposits are in M1 and M2

e. Money market accounts are in M2

27-5 §27.3 source ↗

Explain why the money listed under assets on a bank balance sheet may not actually be in the bank?

Answer

A bank’s assets include cash held in their vaults, but assets also include monies that the bank holds at the Federal Reserve Bank (called “reserves”), loans that are made to customers, and bonds.

27-6 §27.4 source ↗

Imagine that you are in the position of buying loans in the secondary market (that is, buying the right to collect the payments on loans) for a bank or other financial services company. Explain why you would be willing to pay more or less for a given loan if:

a. The borrower has been late on a number of loan payments

b. Interest rates in the economy as a whole have risen since the bank made the loan

c. The borrower is a firm that has just declared a high level of profits

d. Interest rates in the economy as a whole have fallen since the bank made the loan

Answer

a. A borrower who has been late on a number of loan payments looks perhaps less likely to repay the loan, or to repay it on time, and so you would want to pay less for that loan.

b. If interest rates generally have risen, then this loan made at a time of relatively lower interest rates looks less attractive, and you would pay less for it.

c. If the borrower is a firm with a record of high profits, then it is likely to be able to repay the loan, and you would be willing to pay more for the loan.

d. If interest rates in the economy have fallen, then the loan is worth more.

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Problems and answers are adapted from Principles of Economics 3e by Steven A. Greenlaw, David Shapiro and Daniel MacDonald, OpenStax, and are used under the CC BY-NC-SA 4.0 licence. Access for free at https://openstax.org/books/principles-economics-3e/pages/1-introduction. Illustrations: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license. This adaptation is released under the same licence, is non-commercial, and is neither affiliated with nor endorsed by OpenStax or Rice University.