Chapter 10

Money
anything that serves as a medium of exchange, a unit of account, and a store of value
Medium of exchange
anything that is used to determine value during the exchange of goods and services
Barter
the direct exchange of one set of goods or services for another
Unit of account
a means for comparing the values of goods and services
Store of value
something that keeps its value if it is stored rather than used
Currency
coins and paper bills used as money
Commodity money
objects that have value in themselves and that are also used as money
Representative money
objects that have value because the holder can exchange them for something else of value
Fiat money
money that has value because the government has ordered that it is an acceptable means to pay debts
Bank
an institution for receiving, keeping, and lending money
National bank
a bank chartered, or licensed, by the national government
Bank run
widespread panic in which great numbers of people try to redeem their paper money
Greenbacks
paper currency issued during the Civil War
Gold standard
A monetary system in which paper money and coins are equal to the value of a certain amount of gold
Banking in the early twentieth century
creation of single national currency and the gold standard stabilized American banking. They did not provide central decision-making authority.
Federal Reserve system (1913)
the nation’s central banking system
Central bank
bank that can lend to other banks in times of need
Member bank
bank that belongs to the Federal Reserve System
Federal Reserve notes
the national currency we use today in the United States
Great Depression
the severe economic decline that began in 1929 and lasted for more than a decade
Federal Deposit Insurance Corporation (FDIC)
the government agency that insures customer deposits if a bank fails
Banking in the later twentieth century
As a result of the many bank failures, banks were closed from 1933 through the 1960s. Restrictions included the interest rates banks could charge consumers for loans. Banks could also lend money only to customers who had a history of paying back loans on time.
S & L Crisis Deregulation
S&Ls had previously been protected by government regulation. S&L were unprepared for competition after deregulation
Money supply
all the money available in the United States economy
M1
represents money that people can gain access to easily and immediately to pay for goods and services.
Liquidity
the ability to be used as, o directly converted to, cash
Demand deposits
the money in checking accounts
M2 (near money)
Consists of all t he assets in M1 plus several additional assets. These additional M2 funds cannot be used as cash directly, but can be converted to cash fairly easily. M2 assets are also called near money.
Money market mutual funds
a fund that pools money from small savers to purchase short-term government and corporate securities
Fractional reserve banking
a banking that keeps only a fraction of funds on hand and lends out the remainder
Default
failure to pay a bank loan
Mortgage
a specific type of loan that is used to buy real estate
Credit Cards
a card entitling its holder to buy goods and services based on the holder’s promise to pay for these goods and services
Interest
the price paid for the use of borrowed money
Principal
the amount of money borrowed
Debit card
a card used to withdraw money
Creditor
person or institution to whom money is owed
Usury laws
banks cannot charge high interests rates
Deadbeat
someone who does not pay their bills
What are the three uses of money?
Medium of Exchange
a unit of account
a store of value
What are the six characteristics of money?
Durability, portability, divisibility, uniformity, limited supply, acceptability
Give examples of a) commodity money, b) representative money, and c) fiat money
a) Salt, cattle, precious stones
b) IOU, paper receipts for money, “Continentals,” certificates for silver and gold
c) Dollar bills
What contributed to the failure of thousands of banks across the country in the Great Depression?
Banks loaned large sums of money to many high-risk businesses. Many of these businesses proved unable to pay back their loans. Farmers were also unable to pay back loans due to crop failures and hard times on the nation’s farms. In addition, the 1929 stock crash resulted in widespread bank runs as nervous depositors rushed to withdraw their money. The combination of unpaid loans and bank runs resulted in the failure of thousands of banks across the country.
Explain the purpose of the Federal Deposit Insurance Corporation (FDIC)
The FDIC insures customer deposits if a bank fails.
The money supply is all the money available in the U.S. economy. What is the difference between the categories M1 and M2? Give an example of each.
M1: represents money that people can gain access to easily and immediately to pay for goods and services. (Currency, demand deposits, other checkable deposits, traveler’s checks)

M2 (near money): Consists of all t he assets in M1 plus several additional assets. These additional M2 funds cannot be used as cash directly, but can be converted to cash fairly easily. M2 assets are also called near money. (Savings deposits, retail money market funds, small denomination time deposits, total M1)

What are the main functions of financial institutions?
Storing money, saving money, loans, mortgages, credit cards, simple and compound Interest, banks and profit
What are the four most common ways banks offer people to store money?
Savings accounts, checking accounts, money market accounts, certificates of deposits
Name five examples of electronic banking
Automatic teller machines, debit cards, home banking, automatic clearing houses, stored value cards
How does a debit card differ from a credit card?
Debits cards are used to withdraw money. It transfers money from your checking accounts directly to the stores bank accounts. Credit cards are not connected to checking account, the bank gives you money like a loan you have to pay it bank by a certain date.
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