Money & Money Supply
What are the four key characteristics of money?
Portable, Divisible, Durable, Stable
What is the prime rate?
The lowest interest rate commercial banks charge their best customers
What is the FDIC and what does it insure?
A federal agency that insures deposits up to $250,000
What is the Federal Reserve System?
The central bank of the United States
What does the Check 21 Act allow banks to do?
Use digital images of checks for faster processing
What does M-1 include in the money supply?
Currency, demand deposits, and other checkable deposits
What are two services offered by commercial banks?
Accepting deposits and issuing loans
How do banks create money through lending?
By loaning out a portion of deposits, expanding the money supply
What is the reserve requirement?
The percentage of deposits banks must keep on hand or with the Fed
What does the USA PATRIOT Act require from banks?
Increased identity verification to prevent terrorism funding
Why aren’t credit cards included in M-1 or M-2?
Because they represent debt, not actual money being spent
Name two nondeposit financial institutions.
Pension funds and commercial finance companies
What is the purpose of government regulation in banking?
To ensure a sound, stable, and competitive financial system
What happens to the money supply when the Fed sells securities?
It decreases because banks have less money to lend
What is a smart card?
A card with a computer chip that stores electronic money
What’s the difference between M-1 and M-2?
M-2 includes all of M-1 plus near money like savings accounts, CDs, and money market funds
What is a letter of credit?
A guarantee from a bank that a buyer’s payment to a seller will be received on time and for the correct amount
What happens when the FDIC takes over a failed bank?
It disposes of the bank’s liabilities, often at a net loss, but protects consumers
Who appoints the Board of Governors of the Fed?
The President of the United States
What happens if a wire transfer exceeds $10,000?
It must be reported under the Bank Secrecy Act
Explain how bartering compares to using money in terms of efficiency.
Bartering requires a double coincidence of wants, while money provides a common medium of exchange
What is the purpose of trust services in banking?
To manage assets on behalf of individuals or entities for future benefit
Why must banks keep a percentage of deposits in reserve?
To maintain liquidity and support customer withdrawals
Name two tools the Fed uses to control the money supply.
Discount rate, reserve requirements, open-market operations, key rate
What is the collateral for a loan?
An asset pledged by the borrower to secure repayment