Economics topic 6 test

What is one disadvantage of bartering over using currency to purchase goods?

  if you don’t have something that someone else wants you won’t be able to get a good, whereas if you have currency, you can just get whatever good you have enough to pay for.

Why do objects used as money need to be in limited supply?

Prices will go up if there is too much currency, causing its value to decrease. It will cause inflation

What does it mean to say that money is an acceptable form of payment?  

someone who accepts that money can give the person who gave it to them what they were buying, and they can use the money they received to buy something else. medium of exchange.

What are the six characteristics of Money?

Money is durable, money is portable, money is divisible, money is uniform, money supply is limited, money is accepted as a form of payment.

 

If you write someone an IOU note for $1,000,000,000,000, what kind of money have you given them?

I have given them representative money.

What might have happened if banks had not issued large amounts of subprime loans in the early 2000’s?  

less people would have been able to pay for their homes, and they would have lost them.

What was the gold standard?

a monetary system where paper money and coins had a certain value of the certain amounts of gold.

What was the purpose of the FDIC?

to insure people’s deposits if banks fail.

With the gold standard in place the government could issue currency only if ….

It had enough gold reserves to back it up.

Why did some Americans oppose the idea of creating a central bank?

because they thought it was unconstitutional, they had resentment against the eastern banking establishment, they thought it favored the wealthy and would give the government too much power and infringe on individual and states’ rights.

\ Why did the Fed fail to respond to the Great Depression?

because the total value of reserves that the banks were required to maintain was less than the total deposits. The Fed had a tight monetary policy, a refusal to act as lender of last resort, and adherence to the gold standard.

What is the role of each of the 12 Federal Reserve Banks?

To provide banking services to commercial banks and the U.S. Treasury, supervise local banks, and gather regional economic data to help set national monetary policy.  enforce federal rules on member banks. No explotaion

   How does the Federal Reserve serve as the government’s banker?

by providing banks and fiscal services to the government. It maintains a checking account for the government and issues currency for the government. It can increase or decrease amount of money in circulation

  Why does the Federal Reserve conduct bank examination?

to inform the Federal reserve bank of the conditions of its member banks and of the lines of credit which are being extended by them.

What is the effect of too much money in circulation?

causes the supply to be greater than the demand and the money then will lose its value. Too much money leads to inflation.

What are the three key functions of the central bank?

Lenders of last resort- banks borrow money from other banks, also borrow emergency funds from the federal reserve.

Monitor Reserves- Fed uses reserve reports from banks to monitor how much money is in circulation.

Conduct Bank Examinations- Looks for banks that issued too many risky loans.

Which category of the money supply includes deposits in money market mutual funds?

are included in the M2 category of market supply.

What type of loan helps a person purchase a home?

A subprime loan

   Which type of financial institution plays the largest role in the economy?

Commercial banks because they are used by the most people and run what we do.

   What kinds of money are included in M1 and M2?  Why do economists use these different categories?

M1 includes: Assets that have liquidity.

Demand deposits- Funds in checking accounts.

Currency- Funds not in bank.

Travelers check- very small portion.

M2 includes: All assets in M1 plus additional assets.

Near money- Money that can be converted to cash easily savings account, CD’s, money market, mutual fund.

Economists use these different categories to analyze the money supply’s liquidity.

   Why do savers and investors generally work through financial intermediaries?

to reduce risk, increase liquidity, and lower transaction costs.

What relationship does risk have to return?

The higher the risk, the greater the potential for return.

     If you had $500 to invest, what questions would you have as you decided how to invest your money?

I would ask, which product is the most popular? What is the most profitable thing to invest in? Has whatever product I want to invest in shown a return on investments before?

Why do some people invest in bonds with a low interest rate?

because it is a way to protect a portfolio from market volatility, capital preservation, stability, and to provide a stream of income. Bond prices and interest rates move inversely, so if the interest rate is low then the bond price will be high.

    Which type of bond might have been used to construct a school?

 municipal bonds

    What are the advantages and disadvantages of a money market mutual fund?

a balance of safety, liquidity, and income potential. The disadvantages are lower returns compared to riskier assets, potential fees, and a lack of FDIC insurance.

Why does the government issue savings bonds?

primarily to borrow money from individual citizens to help finance federal operations, programs, and public debt. 

    What are two ways to make a profit from investing in a stock?

]capital appreciation and dividends

     What are the four types of stocks discussed in chapter 6?

·       Income stock- Income provided by paying dividends.

·       Growth Stock- Reinvest profits in purchasing more stock.

·       Common Stock- Voting owners of the company.

·       Preferred stock- Nonvoting owners of the company.

  What are shares and what are dividends?

Shares are stocks that are issued in portions and dividends are profits paid out to stockholders usually quarterly