Your answers should be precise. Do not give information not directly relevant for answering the questions. Show all your work in numerical problems to receive full credits. The assignment will be graded on a scale of 0-4. Clarity and grammatical correctness will carry some weights in the evaluation of this assignment.

1. Why do people generally choose to deposit their money in a bank, despite receiving lower interest rates, instead of directly lending it to individuals or businesses who offer higher interest rates on car loans and business loans? Provide a brief explanation. (2 points)

2. After Mia's $200,000 Certificate of Deposit (CD) matures, she deposits $20,000 into her checking account and $30,000 into her saving account, purchases a CD for $105,000, and invests $45,000 in retail money-market mutual fund shares. How do these transactions impact the components of M1 and M2? Provide a comprehensive list of changes in M1 and M2, along with the net effects on both aggregates. (2 points)

3. Some economists suspect that one of the reasons that economies in developing countries grow so slowly is that they do not have well-developed financial system. Does this argument make sense? Explain

4. What is financial intermediation? How does it help the savers? Briefly discuss.

5. Why might a life insurance company insist on an individual having a physical exam before agreeing to provide life insurance to the individual? What type of informational problem that the insurance company tries to minimize by this requirement? Briefly explain.

6. Most of the time it is quite difficult to separate the four functions (uses) of money. Money always performs its three functions, but sometimes we can stress one in particular. For each of the following situations, identify which function of money is emphasized. Give a brief explanation. (1 point)

a) Kevin accepts money in exchange for performing his daily tasks at his office, since he knows he can use that money to buy goods and services.

b) Sarah wants to calculate the relative value of potatoes and tomatoes, and therefore checks the price per pound of each of these goods as quoted in currency units.

7. Discuss whether your money, wealth, or income increases in each of the following situations:

a) You own shares in Facebook. The price of Facebook shares has declined recently.

b) Your boss gives you a 10% raise

c) You take cash out of the bank and use it to buy an Apple iPad