Review Questions

7. What are the four functions that money serves?

8. How does the existence of money simplify the process of buying and selling?

9. What is the double-coincidence of wants?

10. What components of money do we count as part of M1?

11. What components of money do we count in M2?

12. Why do we call a bank a financial intermediary?

13. What does a balance sheet show?

14. What are a bank’s assets? What are its liabilities?

15. How do you calculate a bank’s net worth?

16. How can a bank end up with negative net worth?

17. What is the asset-liability time mismatch that all banks face?

18. What is the risk if a bank does not diversify its loans?

19. How do banks create money?

20. What is the formula for the money multiplier?

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