Functions & Charactaristics

Question 1

Medium of Exchange

Answer 1

An object through which something is transmitted or carried on; transferred

Ex: River, phone, veins

Question 2

Measure of Value

Answer 2

A reference standard used to figure out the worth of something

Ex: paper clips used for buying a sandwich

Question 3

Store of Value

Answer 3

To reserve or put away for future use; of material worth

• Inflation shrinks your store of value
• When you put your money in, you expect that it stays the same and doesn’t decrease in value,
• You want purchasing power to buy what you want 5 years later

Question 4

Portable

Answer 4

Physically small and easy to move from place to place

Question 5

Durable

Answer 5

Something that can last and withstand a really long time

Question 6

Divisible

Answer 6

Something that you can break it into smaller parts but still usable for the same purpose

Question 7

Relatively Scarce

Answer 7

Something that we don’t have too much or too little of

“Money doesn’t grow on trees”

Question 8

Barter

Answer 8

Trading goods and services directly without using money.

Question 9

Commodity Money

Answer 9

Items that have value in themselves and are used as money, like gold or silver.

Question 10

Precious Metal Coins

Answer 10

Coins made from valuable metals like gold or silver.

Question 11

Gold-Backed Paper

Answer 11

Paper money that can be exchanged for a fixed amount of gold.

Question 12

Substitute

Answer 12

Something used in place of something else, like paper money used instead of coins.

Question 12

Inconvertible Flat

Answer 12

Paper money that cannot be exchanged for gold or silver; its value comes from government regulation.

Question 13

Mass Produced

Answer 13

Items made in large quantities, often by machines.

Question 14

Checks

Answer 14

Written orders directing a bank to pay money from an account to someone else.

Question 15

Electronic

Answer 15

Digital forms of money, like online bank transfers or payments.

Question 16

Future

Answer 16

Refers to new and emerging forms of money, like cryptocurrencies.

Question 17

Why is trust so important in how modern money works?

Answer 17

Trust is important in how modern money works because people need to believe that the money they use will hold its value and be accepted by others for goods and services.

Question 18

What are banks for?

Answer 18

• To make a profit off of loans

Question 19

How do banks make profit?

Answer 19

1. Banks Pay Interest Rates:
   
   • Banks offer interest to attract people to deposit their money into savings accounts.
2. They Loan Out the Money:
   
   • Banks take the deposited money and lend it to borrowers (like individuals or businesses) at a higher interest rate.
3. Borrowers:
   
   • Borrowers pay back the loans with interest, and the difference between the interest paid to depositors and the interest received from borrowers is the bank’s profit.

Question 20

What else do banks provide?

Answer 20

• Safe place to keep money (FDIC)
• Provides funds for large purchases
• Affects the supply of money through the multiplier effect

Question 21

What is the Multiplier Effect?

Answer 21

Occurs when a deposit creates more money than the original deposit amount. This is possible because of the reserve requirement

Question 22

What is a reserve requirement?

Answer 22

A rule that says banks must keep a certain percentage of their deposits in reserve and not lend it out

For example, if the reserve requirement is 10%, and you deposit $100, the bank must keep $10 in reserve and can lend on $90 to borrowers. This ensures banks have enough money on hand to meet demands.

Question 23

What is cash leakage?

Answer 23

When people dont spend all their money right away or the bank doesn’t spend it all right away,

Question 24

Equation for total money supply created?

Answer 24

Total deposit / Reserve requirement (assuming no cash leakage)

Question 25

Why is confidence in banks important and why do they need a watchdog?

Answer 25

• Confidence in banks is important because it ensures people trust that their money is safe and will be available when they need it.
• Banks need a watchdog to make sure they follow rules and maintain financial stability.

Question 26

What is monetary policy?

Answer 26

Monetary policy is how the government manages the supply of money and interest rates to control the economy.

Question 27

Why was the federal reserve set up?

Answer 27

Set up in 1913 to make banks safe by giving them loans, acting as the bankers bank

Question 28

Traits of the federal reserve?

Answer 28

• The lender of last resorts
• Controls monetary policy
  -Independent within the government
• Ensure confidence by inspecting banks
• Clears checks
• Ensures fairness in loans