Self-Check Questions


In many arcades, a person buys chips to use for playing games. Within the walls of the arcade, these chips can often be used to buy food and drink. Do chips in an arcade serve all three functions of money?


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


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


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

  1. your $5,000 line of credit on your Bank of America card
  2. $50 worth of traveler’s checks you have not used yet
  3. $1 in quarters in your pocket
  4. $1,200 in your checking account
  5. $2,000 you have in a money market account

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


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 made by banks, for a bank or other financial services company. Explain why you would be willing to pay more or less for a given loan if ________.

  1. the borrower has been late on a number of loan payments
  2. interest rates in the economy as a whole have risen since the loan was made
  3. the borrower is a firm that has just declared a high amount of profits
  4. interest rates in the economy as a whole have fallen since the loan was made