ECN EXAM 3 QUESTIONS AND ANSWERS
What are the three functions served by money? - CORRECT ANSWER✅✅✅1) money serves as a
medium of exchange 2) money serves as a unit of account
3) money serves as a store of value
How does the existence of money simplify the process of buying and selling? - CORRECT
ANSWER✅✅✅Money simplifies the process of buying and selling by being readily available, instead
of people having to barter with each other for a good or service.
What is the double coincidence of wants? - CORRECT ANSWER✅✅✅Each party has a specific good
or service that the other desires.
Define M1 and M2 - CORRECT ANSWER✅✅✅M1 includes currency, travelers checks, and money in
checking accounts. M2 includes all of M1, plus savings deposits, small time deposits like certificates of
deposits, and money market funds.
Why is a bank called a financial intermediary? - CORRECT ANSWER✅✅✅Because banks facilitate the
use of money for transactions in the economy; they operate between savers who supply financial capital
and borrowers who demand loans.
How do banks help money to work better as a medium of exchange? - CORRECT
ANSWER✅✅✅Banks work to supply money in the form of bank accounts, which prevents less theft.
What does a balance sheet show? - CORRECT ANSWER✅✅✅A balance sheet shows assets and
liabilities.
What are the assets of a bank? What are its liabilities? - CORRECT ANSWER✅✅✅The assets of a
bank include its loans, its ownership of bonds, and its reserves. The liabilities of a bank are its deposits.
How do you calculate the net worth of a bank? - CORRECT ANSWER✅✅✅The net worth of a bank is
calculated by subtracting the banks liabilities from its assets.
, What is the asset-liability time mismatch that all banks face? - CORRECT ANSWER✅✅✅A banks
liabilities can be withdrawn in the short term while its assets are repaid in the long term.
What is the risk if a bank does not diversify its loans? - CORRECT ANSWER✅✅✅If a bank does not
diversify its loans then they can experience an unexpectedly high rate of loan defaults and an asset-
liability time mismatch.
How do banks create money? - CORRECT ANSWER✅✅✅Much of the money in the economy is
created by the network of banks making loans, people making deposits, and banks making more loans.
What is the formula for the money multiplier? - CORRECT ANSWER✅✅✅1/reserve ratio
How is the central bank different from a typical commercial bank? - CORRECT ANSWER✅✅✅A
central bank conducts monetary policy, which involves controlling the quantity of money in the
economy.
List the three traditional tools that a central bank has for controlling the money supply. - CORRECT
ANSWER✅✅✅1) open market operations
2) reserve requirements
3) discount rates
Explain how to use an open market operation to expand the money supply. - CORRECT
ANSWER✅✅✅In an open market operation, the central bank has the power to create money. The
federal reserve can create money out of thin air.
Explain how to use the discount rate to expand the money supply. - CORRECT ANSWER✅✅✅To
increase money supply, the discount rate must be lowered so that banks will be more willing to lend
aggressively.
How do the following types of monetary policy affect the quantity of money: expansionary or
contractionary? - CORRECT ANSWER✅✅✅Expansionary monetary policy raises the quantity of
money and credit above what it otherwise would have been. Contractionary monetary policy reduces
the quantity of money and credit below what it otherwise would have been.
What are the three functions served by money? - CORRECT ANSWER✅✅✅1) money serves as a
medium of exchange 2) money serves as a unit of account
3) money serves as a store of value
How does the existence of money simplify the process of buying and selling? - CORRECT
ANSWER✅✅✅Money simplifies the process of buying and selling by being readily available, instead
of people having to barter with each other for a good or service.
What is the double coincidence of wants? - CORRECT ANSWER✅✅✅Each party has a specific good
or service that the other desires.
Define M1 and M2 - CORRECT ANSWER✅✅✅M1 includes currency, travelers checks, and money in
checking accounts. M2 includes all of M1, plus savings deposits, small time deposits like certificates of
deposits, and money market funds.
Why is a bank called a financial intermediary? - CORRECT ANSWER✅✅✅Because banks facilitate the
use of money for transactions in the economy; they operate between savers who supply financial capital
and borrowers who demand loans.
How do banks help money to work better as a medium of exchange? - CORRECT
ANSWER✅✅✅Banks work to supply money in the form of bank accounts, which prevents less theft.
What does a balance sheet show? - CORRECT ANSWER✅✅✅A balance sheet shows assets and
liabilities.
What are the assets of a bank? What are its liabilities? - CORRECT ANSWER✅✅✅The assets of a
bank include its loans, its ownership of bonds, and its reserves. The liabilities of a bank are its deposits.
How do you calculate the net worth of a bank? - CORRECT ANSWER✅✅✅The net worth of a bank is
calculated by subtracting the banks liabilities from its assets.
, What is the asset-liability time mismatch that all banks face? - CORRECT ANSWER✅✅✅A banks
liabilities can be withdrawn in the short term while its assets are repaid in the long term.
What is the risk if a bank does not diversify its loans? - CORRECT ANSWER✅✅✅If a bank does not
diversify its loans then they can experience an unexpectedly high rate of loan defaults and an asset-
liability time mismatch.
How do banks create money? - CORRECT ANSWER✅✅✅Much of the money in the economy is
created by the network of banks making loans, people making deposits, and banks making more loans.
What is the formula for the money multiplier? - CORRECT ANSWER✅✅✅1/reserve ratio
How is the central bank different from a typical commercial bank? - CORRECT ANSWER✅✅✅A
central bank conducts monetary policy, which involves controlling the quantity of money in the
economy.
List the three traditional tools that a central bank has for controlling the money supply. - CORRECT
ANSWER✅✅✅1) open market operations
2) reserve requirements
3) discount rates
Explain how to use an open market operation to expand the money supply. - CORRECT
ANSWER✅✅✅In an open market operation, the central bank has the power to create money. The
federal reserve can create money out of thin air.
Explain how to use the discount rate to expand the money supply. - CORRECT ANSWER✅✅✅To
increase money supply, the discount rate must be lowered so that banks will be more willing to lend
aggressively.
How do the following types of monetary policy affect the quantity of money: expansionary or
contractionary? - CORRECT ANSWER✅✅✅Expansionary monetary policy raises the quantity of
money and credit above what it otherwise would have been. Contractionary monetary policy reduces
the quantity of money and credit below what it otherwise would have been.
