Chapter 12. Money, Banking & the Financial System: Pre-Class & In-Class Activities Packet Name/I.D. Number: Section: Date: Part 3. Discussion Questions and Problems 1. People in a barter economy came up with the idea of money because they wanted to do something to make society better off. Do you agree or disagree with this statement? Explain. 2. Money makes trade easier. Would having a money supply twice as large as it is currently make trade twice as easy? Would having a money supply half its current size make trade half as easy? 3. Money is a means of lowering the transaction costs of making exchanges. Do you agree or disagree? Explain. 4. Can M1 fall as M2 rises? Can M1 rise without M2 rising too? Explain. 5. Why isn't a credit card money? 6. Explain the process by which goldsmiths could increase the money supply. 7. What is a financial system, and why would a country with a well-developed and fully functionally financial system be better off than a country without it? 8. Identify each of the following as either an adverse selection or a moral hazard problem: a. Poor drivers apply for car insurance more than good drivers. b. The federal government promises to help banks that get into financial problems. c. The federal government insures checkable deposits (promises to repay the holder of the checkable deposit if the bank fails). 9. Explain how financial intermediaries help to solve adverse selection and moral hazard problems when it comes to lending and borrowing. 10. Explain the difference between a bank's loans and its borrowings