Money Basics
What are three basic functions of money?
What is medium of exchange; store of value; and Unit of account?
Name the paper currency issued by the Continental Congress during the Revolutionary War that suffered large inflation
What is Continentals?
What is "cash" and why is it considered widely accepted?
What is cash is physical currency; accepted because legal tender and universally recognized
What is monetary policy and which U.S. institution primarily sets it?
What is Monetary policy controls money supply and interest rates; set by the federal reserve.
What is a government bond and what does it promise to investors?
Define "Currency" and gives two examples of forms it can take.
What is Currency: system of money in use; Ex: Coins and Paper Money
What was the main purpose of the First and Second Banks of the United States?
What is To provide a centralized banking structure, support government finance, and stabilize currency and credit
How does a debit card transaction differ from a credit card transaction in terms of when money is deducted and who is lending funds?
Debit deducts immediately from checking account; credit extends line of credit and is repaid later.
Define expansionary monetary policy and name two tools the Fed might use to implement it.
What is Expansionary: increases money supply to lower unemployment and stimulate borrowing; tools: lower the federal funds rate, open market purchases of government securities, lower reserve requirements.
Differentiate between treasury bills, treasury notes, and treasury bonds by typical maturity length.
What is T-Bills:short term (weeks up to 52 weeks), T-Notes: Medium term (1-10 years), T-Bonds: long-term (20-30 years)
Explain why money must act as a "unit of account" in an economy
What is a Unit of account provides common pricing so people can compare value and keep consistent ledgers
Describe the "free banking era" (1836-1865) and one major problem that resulted from it.
What are state-chartered banks issued many different notes causing counterfeiting, bank failures, and confusion.
List three advantages and two risks of electronic funds transfers (EFTs)
What are advantages: speed, convenience, lower marginal transaction cost; better record keeping. Risks: cybersecurity/fraud, exclusion of unbanked individuals.
What is fiscal policy and how does it differ from monetary policy in terms of decision-makers and tools?
Fiscal policy uses government spending and taxes; decided by legislative/executive branches; monetary policy is managed by the central bank using interest rates and money supply tools.
Explain what an exchange rate is and name three factors that can cause it to change.
What is exchange rate: price of one currency in terms of another. Factors: relative interest rates, inflation, trade balances, political stability.
Describe two security or design features that help prevent counterfeiting of paper money.
What are watermarks, security threads, color-shifting ink, microprinting, raised printing.
What major change did the Federal Reserve Act of 1913 introduce to U.S. currency?
What is it authorized Federal Reserve notes and created a central bank to provide a stable monetary system
Explain how a personal check functions and one reason businesses might prefer electronic payments over checks.
What is a check orders a bank to pay a specified sum from he payers account; businesses prefer electronic for speed, lower processing cost, and reduced fraud.
Describe one scenario where the Fed would use contractionary policy and the likely intended economic effect.
What is Use when inflation is high; raise interest rates and sell government securities to reduce money supply and cool inflation.
Describe how a country's adoption of a weak currency (relative to trading partners) can affect its exports and imports.
What is Weaker currency makes exports cheaper (boosts exports) and imports costlier (reduces imports), potentially improving trade balance but increasing import prices and inflation
Compare and Contrast "store of value" and "medium of exchange" and give one historical example where money failed at one of these functions
What is store of value preserves purchasing power; medium of exchange facilitates transactions
Explain the shift from the gold standard to fiat money and identify the year the U.S. fully ended convertibility of dollars to gold
Gradual shift culminating in 1971 when President Nixon ended convertibility of dollars into gold; money became fiat
Evaluate the pros and cons of a society moving from primarily cash transaction to primarily digital payments.
What are Pros: efficiency, traceability, lower cash-handling costs, easier monetary policy transmission. Cons: digital divide, cybersecurity risks, possible bank dependence and surveillance.
What is Coordination: fiscal stimulus plus loose monetary policy can reduce unemployment; conflict: fiscal stimulus can worsen inflation while the fed may tighten policy to control inflation, reducing stimulus effectiveness.
Suppose a U.S. investor buys a 10-year T-note paying semiannual interest. Explain how interest-rate risk and inflation risk could affect the real value of the investor’s returns over time.
What is Interest-rate risk: if market rates rise, the note’s market value falls. Inflation risk: higher inflation erodes real purchasing power of interest payments and principal.