financial_flashcards
What was the Gold Standard?
A system where each unit of currency was backed by a fixed amount of gold.
Why couldn’t governments print unlimited money under the Gold Standard?
Because they could only issue money based on the gold reserves they held.
What was the main advantage of the Gold Standard?
Stable prices and strong confidence in money.
What was the main disadvantage of the Gold Standard?
Governments couldn’t print money in crises, leading to deflation and economic recessions.
Why did the Gold Standard end?
WWI and the Great Depression forced governments to print more money than gold reserves allowed.
What was the 1933 U.S. Executive Order 6102?
It made gold ownership illegal in order to push people into using paper money.
What was the impact of abandoning the Gold Standard?
Governments gained more control over money supply but also increased inflation risk.
What was the Bretton Woods System?
A post-WWII monetary system where the U.S. dollar was backed by gold, and other currencies were pegged to the U.S. dollar.
Why did the Bretton Woods System collapse?
The U.S. printed too many dollars (Vietnam War, social spending), causing a loss of trust in the dollar’s gold backing.
What was the Nixon Shock?
President Nixon ended gold convertibility in 1971, moving the world to fiat currency.
What is fiat money?
Money that is backed by government trust rather than a physical commodity like gold.
What was the advantage of fiat money?
Gives governments flexibility to manage economies by adjusting money supply.
What is the biggest risk of fiat money?
Governments can print too much, leading to inflation or hyperinflation.
Who was John Maynard Keynes?
An economist who argued that governments should manage the economy through spending and money supply control.
What is the Keynesian solution to a recession?
Governments should spend more to stimulate demand, even if it means borrowing.
What is the risk of Keynesian economics?
If governments over-borrow without increasing productivity, debt becomes unsustainable.
How do banks create money?
Through lending; they only keep a fraction of deposits and loan out the rest, multiplying money supply.
What is the reserve requirement?
The percentage of deposits banks must keep and not lend out (e.g., 10%).
How does the money multiplier work?
If a bank keeps 10% reserves and loans the rest, a $1,000 deposit can create up to $10,000 in the economy.
What causes hyperinflation?
When money supply grows much faster than the production of goods and services.
Give an example of hyperinflation.
Weimar Germany (1923) - Prices doubled every few hours; Zimbabwe (2000s) - 89.7 sextillion percent inflation.
Why don’t price controls stop hyperinflation?
If businesses can’t make a profit at controlled prices, they stop producing, leading to shortages and black markets.
What happens if a country borrows too much?
If debt grows faster than GDP, it becomes unsustainable and can lead to default or crisis.
What was the 2008 Financial Crisis caused by?
Excessive debt creation through subprime mortgages, leading to a financial bubble and collapse.
What was Argentina’s economic problem?
Repeated defaults due to high debt and inflation caused by excessive money printing.
What tools do central banks use to control the economy?
Adjusting interest rates, open market operations (buying/selling bonds), and quantitative easing.
What is Quantitative Easing (QE)?
A central bank prints money to buy financial assets, injecting liquidity into the economy.
How do central banks fight inflation?
They raise interest rates to slow borrowing and spending.
Why do central banks lower interest rates?
To encourage borrowing and economic growth when inflation is low.
What is the key lesson from financial history?
Money supply must grow in balance with productivity to avoid inflation or economic collapse.
How can a country manage debt successfully?
Ensure GDP growth is higher than the interest rate on its debt.
Why can’t governments print unlimited money?
Because it devalues the currency, leading to inflation and economic instability.
What is the most important rule of money?
Printing money does not create wealth—only productivity does.
