The Role and Nature of Money
What are the three main functions of money?
Medium of exchange, unit of account, store of value.
What year was the First Bank of the United States created?
1791
In what year was the Federal Reserve established?
1913
What does FDIC stand for and what does it do?
Federal Deposit Insurance Corporation; insures deposits up to $250,000.
What’s the difference between a debit card and a credit card?
Debit pulls directly from your account; credit lets you borrow money.
What are stocks?
Shares of ownership in a corporation.
What is the difference between commodity and fiat money?
Commodity money has intrinsic value; fiat money is backed by government trust.
Why did the First Bank of the U.S. end?
Its charter expired in 1811 and was not renewed.
How many regional Federal Reserve Banks are there?
12
What caused the 2008 financial crisis?
Risky home loans with balloon interest rates and mortgage defaults.
What’s one smart strategy for using credit cards?
Only charge what you can pay off; pay weekly to avoid interest.
What is a bond?
A loan to a corporation/government with a fixed interest return.
What are two examples of representative money?
Paper money backed by gold or silver; gold/silver certificates.
What was the Free Banking Era and when did it occur?
A period (1837–1863) without a federally chartered bank.
What does the Federal Open Market Committee (FOMC) do?
Sets interest rates and controls the growth of the money supply.
What is foreclosure?
When a bank takes possession of a property due to unpaid loans.
What is “liquidity” in financial terms?
Ease of converting an asset into cash.
What is diversification and why is it important?
Investing in a variety of assets to reduce risk.
Name four of the six factors that make currency effective.
Uniformity, portability, acceptability, durability, divisibility, scarcity.
What issue arose during the Free Banking Era?
State banks didn’t always have enough gold/silver to back currency, and fraud.
What’s the role of the Board of Governors in the Federal Reserve?
Oversees the system; members are appointed by the President.
What is the Federal Funds Rate?
Interest rate banks charge each other to lend reserve balances.
What’s a Certificate of Deposit (CD)?
A timed deposit with interest, offered by banks/credit unions.
What’s the difference between capital gain and capital loss?
Gain = sold for more than purchase; Loss = sold for less.
Why did early indigenous peoples in South America use cacao beans as money?
They were a valuable, tradable commodity in their culture.
How did Civil War reforms impact U.S. banking?
Created federally chartered banks, standardized currency, and required reserves.
How did the Fed respond to the Great Depression?
Initially fragmented; later reforms centralized its power in 1935.
How did balloon interest rates contribute to the housing crash?
Interest rates started low but increased drastically, leading to defaults.
What’s a credit score used for?
To predict a person’s reliability in repaying debts
What is the difference between the capital and money markets?
Capital = long-term funds; Money = short-term (under a year).