Money and the Financial System

Multiple Choice Questions

After watching the Money and the Financial System video lecture, consider the question(s) below. Then “submit” your response.

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1. Money represents anything that can be exchanged for goods and services or for the:

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B.
C.
D.

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2. Money has three roles in an economy. It is a medium of exchange, a unit of account, and a(n):

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B.
C.
D.

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3. The M1 definition of the money supply used by the government includes:

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B.
C.
D.

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4. The market for loanable funds most specifically connects:

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B.
C.
D.

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5. The price of loanable funds is the:

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B.
C.
D.

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6. _____ minimize the risk of lending money by pooling money from many savers and by lending to many borrowers.

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B.
C.
D.

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7. Because banks are in the business of lending money, they will _____ so savers don’t need to.

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B.
C.
D.

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8. Bonds are an IOU from a business or a government promising to pay back the value of the bond plus:

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B.
C.
D.

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9. _____ pay(s) the lowest interest rate.

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B.
C.
D.

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10. When a company issues stock, it is agreeing to share the company’s _____ and _____ with the investor.

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B.
C.
D.

True/False Questions

After watching the Money and the Financial System video lecture, consider the question(s) below. Then “submit” your response.

Question

1. Among the roles that money serves in an economy, money is considered a unit of account.

A.
B.

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2. When the demand for loanable funds increases, interest rates decline.

A.
B.

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3. From the standpoint of an investor, investing in a stock or a bond is similar.

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B.

Short Answer/Discussion Questions

After watching the Money and the Financial System video lecture, consider the question(s) below. Then “submit” your response.

Question

1. What are the differences between the money supply measures of M1 and M2?
Suggested solution: M1 consists of currency (bills and coins) and demand deposits, such as checking accounts. These represent assets that can instantly be used as cash. This is a core measure of the money supply. M2 is M1 plus savings accounts, money market deposits, money market mutual funds, and small-denomination time deposits. The M2 additions to the M1 definition of the money supply represent assets that can quickly (but not instantly) be converted to cash.

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2. Banks are institutions that match savers and borrowers. What benefits do banks provide to savers as a means of connecting with borrowers?
Suggested solution: Because banks are in the business of lending money, they reduce the risks of nonpayment by pooling money from many savers to lend to many borrowers. The failure of an individual borrower to repay a loan is diluted among many savers. Banks are also in a better position to assess the credit-worthiness of borrowers because of information they can collect on borrowers’ credit histories. Lastly, banks reduce the transaction costs of the lending process.

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3. What are the implications of risk when savers determine how much they will charge borrowers for the use of their saved funds?
Suggested solution: The price of funds loaned by savers to borrowers is expressed as the real interest rate. The risk from a savers standpoint is the possibility the loan made to the borrower will not be repaid. In order for savers to be compensated for the greater risk of loss from nonrepayment of a loan, they will charge higher interest rates to risky borrowers and lower rates to low-risk borrowers. For example, the U.S. government has never defaulted on a loan and pays the lowest rate of interest