Barter to Bitcoin

What are the main instruments of the money market?

Short-term debt instruments with maturity < 1 year such as Treasury bills, commercial paper, negotiable CDs, repos, and federal funds.

Why do money market instruments belong to the money market?

They are used to manage short-term liquidity, are low risk, highly liquid, and have maturities under one year.

What happens to a bank’s balance sheet when it issues a loan?

Assets increase (loan), liabilities increase (deposits), and M1/M2 increase because new deposits are created.

What happens to a bank’s balance sheet when it raises equity?

Assets increase (cash received), equity increases, and M1/M2 can fall if deposits are used to buy the shares.

What are off-balance sheet activities?

Income-generating activities not on the balance sheet, such as loan commitments, loan sales, and fee-based services.

Why are off-balance sheet activities important?

They create hidden risks and income streams that don’t appear in traditional asset/liability figures, so banks need strong internal controls.

What happens to M1 and M2 when money moves from checking to savings?

M1 decreases, M2 stays the same.

What’s the correct liquidity ranking (most to least) for currency, checking deposits, savings deposits, common stock, automobiles, houses?

Currency → Checking deposits → Savings deposits → Common stock → Automobiles → Houses.

Why do governments regulate financial markets?

To increase information transparency and to ensure financial stability.

Give an example of regulation that improves information.

Disclosure laws or KYC requirements that reduce information asymmetry.

Give an example of regulation that ensures stability.

Deposit insurance, entry restrictions for banks, or asset holding limits.

Why is the Yap stone money example significant?

It shows that money can function as a social record of ownership rather than a physical medium of exchange.

What are Mishkin’s three functions of money?

Medium of exchange, unit of account, store of value.

What is Martin’s alternative to “medium of exchange”?

Instrument of transferable debt — highlighting credit relationships rather than physical tokens.

How do banks create money?

By issuing loans that simultaneously create deposits, increasing M1/M2.

What’s included in M1?

Currency in circulation, checkable deposits, other checkable deposits.

What’s included in M2?

Everything in M1 plus savings deposits, small time deposits, and retail money market funds.

Why are bonds safer than stocks?

Bondholders are creditors with fixed payments and priority in bankruptcy, while stockholders are residual claimants.

Why do financial intermediaries exist?

They solve information and trust problems between savers and borrowers by screening, monitoring, and enforcing contracts.

What’s the difference between money market instruments and financial intermediaries?

Money market instruments are short-term debt instruments (e.g. T-bills, commercial paper, repos) used to manage liquidity. Financial intermediaries are institutions (e.g. banks, pension funds, mutual funds) that channel funds from savers to borrowers.

What happens to a bank’s balance sheet and the money supply when it raises equity?

Assets increase (cash received), equity increases, and M1/M2 can fall if households use deposits to buy shares, because deposits leave the money supply and become bank capital.

What are off-balance sheet activities?

Income-generating activities that don’t appear as assets or liabilities, such as loan commitments, loan sales, or fee-based services.

Why are off-balance sheet activities important?

They expose banks to risks that aren’t visible in standard balance sheets, making internal controls crucial.

How do banks actually create money?

By issuing loans that simultaneously create deposits. A loan is recorded as an asset, and the borrower’s account is credited as a liability, increasing M1/M2.

Why is the “pure barter economy” story considered a myth?

No society has ever relied purely on barter. Money likely emerged as a record of debts and obligations, not just as a medium of exchange.

How does this barter myth connect to the functions of money?

It challenges the idea that money’s main role is a medium of exchange, and supports Martin’s framing of money as an instrument of transferable debt.

What are the three categories of financial intermediaries and an example of each?

Banks (e.g. Swedbank), Contractual savings institutions (e.g. pension funds, insurance), and Investment intermediaries (e.g. mutual funds, hedge funds).