macro final, short essay questions

Front

how do economists define money? what are the 3 functions of money?

(explain each)

Back

money is that which performs the functions of money.

the 3 functions of money:

1- store of value:

transports purchasing power over time a space

2- unit of account

denominates prices and writes contracts

3- medium of exchange

• is a "go between" in trade/exchanges

Front

what are the principal assets and liabilities of banks?

(explain each)

Back

principal Assets :

reserves

are held against deposits.

bonds

are secondary reserve assents,

they are easy to sell.

loans

are high yielding assets but have default risk.

principal liabilities:

deposit liabilities

are a cheap source of funds that are unstable and inelastic.

borrowed funds

are more expensive but stable and elastic

capital

is the owners investment in the bank that provides a cushion to cover losses.

Front

what is the liquidity problem in banking?

(explain)

Back

the liquidity problem is when there is a large outflow of funds from either depositors or creditors, that is greater then the banks reserves.

Front

what is the insolvency problem in banking?

(explain)

Back

the insolvency problem in banking is when there is a large loss from either bad loans or bad trades that is greater then the banks capital.

Front

how can government policy makers prevent a liquidity problem at a major bank from starting a panic?

(explain)

Back

is when the federal reserve uses the lender of last resort by making emergency loans to prevent the panic.

Front

how can policy makers deal with insolvency problems in our financial system?

(explain)

Back

small banks

-will not cause a lot of economic damage.

-so they will be liquidated

midsize banks

- will be sold to a larger healthier banks.

large banks

-are too big to liquidate can be to big to sell.

- have to find creative ways to help the bank not be/become insolvent