Chapter 14 - Money and Banking

Question 1

Barter

Answer 1

Trading one good or service for another

Question 2

Double coincidence of wants

Answer 2

2 people each want some good or service that the other person can provide

Question 3

Medium of exchange

Answer 3

Money acts as an intermediary between the buyer and the seller

Question 4

Four functions of money

Answer 4

Medium of exchange, store of value, unit of account, standard of deferred payment

Question 5

Store of value

Answer 5

Something that serves as a way of preserving economic value that can be spent or consumed in the future

Question 6

Unit of account

Answer 6

The ruler by which other values are measured

Question 7

Standard of deferred payment

Answer 7

Money is usable today to make purchases, it must also be acceptable to make purchases today that will be paid in the future

Question 8

Commodity money

Answer 8

Gold, shells, things that have value that can be used to trade

Question 9

Commodity-backed money

Answer 9

Bills that are backed by a commodity like gold

Question 10

Fiat money

Answer 10

Has no intrinsic value, but is declared by a government to be the legal tender of a country. Not backed by a commodity

Question 11

Liquidity

Answer 11

How quickly something can be converted into cash

Question 12

M1 money supply

Answer 12

Very liquid assets like cash, checkable (demand) deposits, and traveler’s checks

Question 13

M2 money supply

Answer 13

Less liquid assets like savings and time deposits, certificates of deposits, and money market funds, plus all of M2 money supply

Question 14

Coins and currency in circulation

Answer 14

Coins and bills that circulate in an economy that are not held by the U.S. Treasury, at the Federal Reserve Bank, or in bank vaults

Question 15

Checking/demand deposits

Answer 15

Amounts held in checking accounts

Question 16

Savings deposits

Answer 16

Bank accounts on which you cannot write a check directly, but from which you can easily withdraw the money at an automatic teller machine or bank

Question 17

Money market funds

Answer 17

Deposits of many individual investors are pooled together and invested in a safe way

Question 18

Certificates of deposits or time deposits

Answer 18

Accounts that the depositor has committed to leaving in the bank for a certain period of time in exchange for a higher interest rate

Question 19

Debit card

Answer 19

Instruction to the user’s bank to transfer money directly and immediately from your bank account to the seller.

Question 20

Credit card

Answer 20

Not money, a short-term loan from the credit card company

Question 21

Smart card

Answer 21

Store a certain value of money on the card and then use the card to make purchases

Question 22

Payment system

Answer 22

Helps an economy exchange goods and services for money or other financial assets

Question 23

Transaction costs

Answer 23

Costs associated with finding a lender or a borrower for money

Question 24

Financial intermediary

Answer 24

Institution that operates between a saver who deposits money in a bank and a borrower who receives a loan from that bank.

Question 25

Depository institutions

Answer 25

Institutions that accept money deposits and then use these to make loans

Question 26

Balance sheet

Answer 26

Financial statement that takes snap shot on a specific date of a company’s financial state

Question 27

Asset

Answer 27

Anything owned of value

Question 28

Liability

Answer 28

Any debts that are owed

Question 29

Net worth (Owner’s equity)

Answer 29

Anything left over after subtracting liabilities from assets

Question 30

Bank capital

Answer 30

A bank’s net worth

Question 31

T-account

Answer 31

A balance sheet with a two-column format, with the T-shape formed by the vertical line down the middle and the horizontal line under the column headings for “Assets” and “Liabilities”

Question 32

Primary loan market

Answer 32

Where loans are made to borrowers

Question 33

Reserves

Answer 33

Money that the bank keeps on hand, and that is not loaned out or invested in bonds

Question 34

Diversify

Answer 34

Making loans or investments with a variety of firms, to reduce the risk of being adversely affected by events at one or a few firms

Question 35

Three bank assets

Answer 35

Bonds, reserves, and loans

Question 36

When a bank will run a negative net worth

Answer 36

When the value of their assets declines

Question 37

Money multiplier formula

Answer 37

1 / reserve requirement

Question 38

Money multiplier

Answer 38

Quantity of money that the banking system can generate from each $1 of bank reserves