Select Answers to Problems in the Book

Select Answers to Problems in the Book -...

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CHAPTER 1 Review Questions 1. No, the funds would not generally be allocated to most valued uses; financial markets and insti- tutions work better. 3. The financial system provides three key services to savers and borrowers: risk sharing (people can share and transfer risk), liquidity (people can exchange their assets for other assets at low cost), and information (financial markets com- municate information, and financial institutions specialize in gathering and using information about borrowers, so they lend more efficiently). 5. Monetary theory focuses on the relationships linking changes in the money supply to changes in aggregate output and prices. The Fed should understand how its actions affect the economy. For everyday financial and economic decisions, we need to know what effects money has on the economy. Analytical Problems 7. The local bank provides risk-sharing, liquidity, and information services. 9. In a global economy, their exports to the United States would decline, possibly leading to an eco- nomic downturn. CHAPTER 2 Review Questions 1. To serve as money, they must generally be accepted as means of payment. Your acceptance of dollar bills and checks as money is based on your belief that others will accept them. 3. In a barter system, there are too many prices, and nonstandard goods complicate pricing. Trade requires a double coincidence of wants. 5. Commodity money has real uses (e.g., gold, sil- ver); fiat money has no intrinsic value. 7. A payments system is a mechanism for conduct- ing transactions. If the payments system became less efficient, the costs to the economy would be fewer and more costly transactions, that is, los- ing gains from specialization. 9. No. Houses, bonds, and stocks are also stores of value. There is an advantage to money’s being a store of value, because after trading for it, a per- son can hold it; otherwise, something else that is also a store of value is likely to become money. 11. The definitions of the money supply range from narrow, M1 , to the broader, M2 . The definitions of the money supply can be used for different purposes and have varied over time in their use- fulness for predicting future movements in prices and output. Analytical Problems 13. Whether caused by inflation or deflation, changes in the purchasing power of money affect money’s usefulness as a store of value and as a standard of deferred payment. 15. The reason is convenience; transactions costs of running to the bank all the time are avoided. 17. Not necessarily; if prices rose more than 10%, your real income has fallen. 19. In Friedmania, bad money drives out the good; people will spend the new crowns and hoard the old crowns. 21. Liquidity indicates the ease with which an asset can be converted to definitive money. Ranking from most to least liquid: dollar bill, checking account, money-market mutual fund, passbook savings account, corporate stock, gold, house.
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This note was uploaded on 03/14/2011 for the course MGMT 241 taught by Professor Brown during the Spring '11 term at University of Phoenix.

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Select Answers to Problems in the Book -...

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