SOLUTIONS TO SELF-CHECK QUESTIONS

11.1 Defining Money by Its Functions

1. 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.
2. 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.

11.2 Measuring Money: Currency, M1, and M2

1. 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.

2.   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

11.3 The Role of Banks

1. 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.

11.4 How Banks Create Money

1.   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.[/hidden-answer]