quiz questions and answers

What is the financial system?

A system that facilitates production, employment, and consumption, allowing economic growth.

What is the central bank of the United States?

The Federal Reserve System.

What are the key characteristics of money?

A quality that defines money, including being a store of value, a means of payment, and a unit of account.

What does the unit of account function of money refer to?

Refers to how prices are expressed in terms of money.

What is the store of value function of money?

Allows people to transfer value into the future.

What is the value of fiat money based on?

Comes from government decree.

Is U.S. currency commodity-backed money?

False; it is not commodity-backed money.

What does liquidity of an asset mean?

How quickly an asset can be converted into cash without losing value.

Can you rank assets from most liquid to least liquid?

Currency (cash), checking account deposits, savings deposits, stocks, automobiles, houses.

Who can create money?

Central Banks and Commercial Banks.

What are the assets of a central bank?

Loans, securities, and gold; currency is a liability.

What are reserves in the banking context?

Assets of commercial banks and liabilities of the central bank.

What are the components of the monetary base?

Currency in the hands of the public and bank reserves.

What happens to the monetary base during a bank run?

No effect; monetary base is the currency in circulation.

Do commercial banks lend other people's money?

False; banks do not lend other people's money.

What types of money do central banks create?

Physical money and electronic money.

What are demand deposits on a bank's balance sheet?

Considered a liability.

Can banks create money?

True; banks can create money via accounting operations.

What services do banks provide?

Providing a means for circulating money, lending, and holding deposits.

Do banks need reserves and deposits before giving loans?

False; banks do not need both prior to giving a loan.

What is the primary financial market?

Where newly issued securities are sold and bought.

What are secondary financial markets?

Markets where existing securities are bought and sold.

What are equity markets?

Markets for stocks.

What is the money market?

Where debt instruments with maturities less than one year are traded.

What is a financial instrument?

Examples include stocks, bonds, and insurance policies, but not items like a cellphone bill.

What is a U.S. Treasury bond?

A liability of the U.S. government and an asset for the holder.