Unit 4: Chapter 10: Money and the Financial Market

Question 1

What are the three types of currency?

Answer 1

Commodity, Representative, Fiat

Question 2

Define the term: M-1

Answer 2

All the money people have and can spend immediately

Question 3

Define the term: M-2

Answer 3

M-1 Plus all the money people can access and spend after a short delay (savings, investments etc.)

Question 4

Define the term: Legal Tender

Answer 4

Currency that creditors MUST accept by law

Question 5

What are the three functions of money?

Answer 5

Means of payment
Measure of Value
Means of Storing Purchasing Power

Question 6

What are the problems with a barter system?

Answer 6

Inefficient, and different items have different value in relation to each other that has to be negotiated

Question 7

What are the positives and negatives of a commodity based currency?

Answer 7

Positives: Easy to acquire more currency
Negatives: Subject to high inflation, no standardized value

Question 8

What are the positives and negatives of a representation based currency?

Answer 8

Pros: More stable than commodity, based on a measurable standard of wealth (gold etc)
Cons: Limited ability to increase the money supply, leads to conflict in search of more wealth

Question 9

What are the positives and negatives of a fiat based currency?

Answer 9

Pros: More control over factors that can improve or worsen conditions of the economy, easy to create more money as needed
Cons: Not backed by anything physical, subject to loss of faith in the currency internationally

Question 10

Define the term: Full bodied coin

Answer 10

A coin that contains a quantity of metal equal to or greater than its face value

Question 11

Define the term: Token coin

Answer 11

A coin that contains less of a quantity of metal than its face value

Question 12

What are the 5 desired characteristics of money?

Answer 12

Convenience
Portability
Divisibility
Durability
Stability

Question 13

What makes up the financial markets

Answer 13

All organizations that assist households in channeling their money to businesses and governments, banks, insurance companies, investment firms, and credit unions

Question 14

What was the problem of banks issuing their own currency?

Answer 14

Lack of recognition from place to place/state to state resulting in limited purchasing power during travel

Question 15

How did the United States solve the problem of unlimited currencies?

Answer 15

Placed taxes on currencies issued by private banks in the National Banking Act

Question 16

What are the four levels of regulation in the US banking system

Answer 16

Comptroller of the Currency
Federal Reserve System
Federal Deposit Insurance Corporation
State Banking Authorities

Question 17

Define the term: Charter

Answer 17

The legal permission to operate as a bank granted from states or the federal government

Question 18

What are the 3 functions of commercial banks

Answer 18

Accept and guard deposits
Provide Loans
Misc. Services

Question 19

Be able to name financial institutions that are not state or national banks and their role

Answer 19

Savings and Loan Associations - Use savings to provide loans
Mutual Savings Banks - Operate like S&L’s but limited to the Northeast
Credit Unions - Members of a group pool savings to provide loans
Finance Companies - Provide loans with higher interest rates to offset risk
Investment Companies - People who pool together to invest in other businesses