Ch. 5 ~ Banking and Finance
Which of the following illustrates the difference between the U.S. dollar, a form of fiat money, and a U.S. gold certificate, a representative currency
a US dollar doesn't represent a claim to some specific asset
which of the following describes the practice of fractional-reserve banking
a bank loans a percentage of every depositor's funds to borrowers
centralized banking system
a banking system in which all monetary decisions are mandated by a central regulatory body
corporate bond
a bond issued by a corporation that is used to raise financing
municipal bond
a bond issued by a local government to finance public projects and infrastructure repairs
junk bond
a bond that has a higher risk of default but pays a higher yield in order to make it attractive to buyers
credit card
a card used to issue borrowed funds for payment
debit card
a card used to withdraw or transfer funds from a checking account
trade-off
a compromise made between two incompatible outcomes
bond
a debt instrument issued to investors for the purpose of raising funds
great depression
a decade-long depression beginning in 1929 with a collapse of the stock market and numerous bank runs
panic of 1837
a financial crises that preceded a three-year-long recession
capital market
a financial market that facilitates the trade in long-term investments. it is further divided into the primary and secondary market
money market
a financial market that facilitates the trade in short-term debt investments
direct financing
a form of lending in which funds are transferred directly from savers to borrowers
indirect financing
a form of lending in which funds are transferred from savers through financial intermediaries to borrowers
federal deposit insurance corporation
a government owned entity whose sole purpose is to provide insurance for bank deposits
interest rate
a percentage of loaned funds paid by a borrower insurance - protection against the possibility of financial loss
free banking era
a period from 1837 to 1862 in which state-chartered banks and unchartered "free banks" were prominent
bimetallism
a standard by which both silver and gold served as monetary standards
free enterprise system
a system in which private business have the freedom to organize and operate for profit in competition with one another
full-reserve banking
a system of banking in which banks have the full amount of every depositor's funds on hand
fractional-reserve banking
a system of banking is which banks hold a portion of all deposits made lending the remainder out to borrowers
who supported and led the push for chartering the first central bank of the US
alexander hamilton
demand deposit
an account from which deposited money can be withdrawn at will
unit of account
an agreed-upon measure for stating prices of goods and services
creditor
an entity that lends funds to another with the intention of being repaid in the future
which of the following is an example of financial investment
an individual purchases stock with the intent to sell it later at a higher price
financial asset
an intangible asset with its monetary value derived from a contractual claim
which of the following is an example of a bond being traded on the secondary market
an investor sells a bond to another investor
asset
any property that has monetary value
money
anything generally accepted in exchange for goods and services
A significant amount of legislation passed in the 20th century sought to reduce the risk of future economic events like the liquidity crisis experienced by banks during the Panic of 1907. Which of the following policies would increase the risk of a liquidity crisis
banks are required to store a smaller percentage of depositor funds in their vaults
currency
bills and coins used to purchase products
the gold standard act of 1900 ended the standard known as
bimetallism
federal reserve banking system
central banking system of the united states established by the federal reserve act of 1913
Consider a hypothetical economy in which rice functions as money. In addition to being valued as money, rice is valued as a consumer good. In this scenario, rice is said to be
commodity money
Which of the following is a 20th-century banking development that allows an individual to transfer funds from a checkable deposit directly to a vendor for payment
debit card
savings bond
debt securities issued by the US department of the treasury to finance government spending
Elena is excited to invest, but she is worried that she might lose her investment funds by making risky investments. How could Elena use diversification to manage her risk
elena could purchase multiple assets from multiple sources
borrowers
entities that receive money from a lender with the intent to repay
gold standard act of 1900
established gold as the only standard for redeeming paper money
banking (glass-steagall) act of 1933
established the federal deposit insurance corporation and separated commercial and investment banking
federal reserve act of 1913
established the federal reserve banking system
Elijah is concerned that his bank is making poor financial decisions and worries that his $1,200 deposited in savings will be lost if the bank were to fail. As long as his bank meets the necessary requirements, which of the following protects Elijah against this potential loss
federal deposit insurance corporation
brokerage firms
firms that employ stockbrokers to facilitate the trade of stock
commodity money
goods that can be used as a medium of exchange and have intrinsic value for other uses
home owners' loan act of 1933
great expanded home ownership by replacing short-term mortgages with long-term mortgages at lower rates of interest backed by the federal government
Investors are often presented with risky investment opportunities. While high risk is typically avoided by savvy investors, which of the following would the ideal risky investment offer
higher returns and higher liquidity than other investments
savers
individuals who forgo some amount current consumption
diversification
investing in assets of multiple types and sources to limit the amount of loss that could occur from the failure of any one investment
mutual funds
investment funds owned by a group of investors and managed by a professional fund manager
short-term investments
investments that are held for one year or less
long-term investments
investments that are held for over one year
destiny prefers investments that offer the highest possible returns even if they are risky. which of the following bonds is destiny most likely to be interested in
junk bonds
deposit and distribution act of 1836
legislation allowing local banks to manage federal revenues
national banking act of 1863
legislation establishing a system for chartering national banks and establishing a national currency, the greenback
michigan act of 1837
legislation granting banking charters to individuals and groups meeting established criteria without needing approval from legislature
banking act of 1935
made the federal deposit insurance corporation permanent
specie circular of 1836
mandated that public lands could only be purchased with gold and silver coins
Gold has historically functioned as money. This is due, in part, to the willingness of others to accept it as valid payment for goods and services. In this case, gold is functioning as a(n
medium of exchange
fiat money
money declared by government order to be legal tinder
a bond issued by the US treasury with a maturity of 90 days is sold on the
money market
representative money
money that doesn't have value in itself but entitles the holder to a share of something valuable
which of the following acts was passed to help fund the union's war efforts during the american civil war
national banking act of 1863
capital loss
negative profit accumulated from selling stock at a lower price than its purchase price
Two investors are each issued one bond with the same face value, maturity date, and yield. After both bonds have reached maturity, it is discovered that one of the bondholders received a greater total return on her investment. If all expected payments were received, which of the following could explain the difference in return
one of the bonds was sold at face value while the other was sold below face value
capital gain
profit earned from selling stock at a higher price than its purchase price
financial services modernization act of 1999
repealed the glass-steagall act and allowed banks, securities, and insurance firms to form financial institutions offering a range of financial products
Sarah has an apple and Ava has a bag of chips. Sarah would rather consume the bag of chips, and Ava would prefer to consume the apple. Which of the following is an example of bartering
sarah trades her apple for ava's bag of chips
financial intermediary
serves as a middleman for financial transactions between two parties financial
Skylar is looking to purchase real estate as an investment using all of her available funds, but she has several concerns. Which of the following concerns are valid from an investment standpoint
she might miss a better investment opportunity because real estate is not particularly liquid
Which of the following policies was implemented in the Banking Acts of 1863 and 1864 to discourage state banks from competing with the newly-chartered national banks
taxes were levied on state banks
which of the following difficulties would andrew jackson have faced in implementing his preferred currency of gold and silver coin
the US stock of gold and silver was too limited under jackson's presidency to provide a sufficient money supply
first bank of the US
the US's first central bank, chartered in 1791
second bank of the US
the US's second central bank, chartered in 1816
portfolio
the collection of an entity's investments
maturity date
the date that the bond is due to be repaid to the investor
over-the-counter (OTC) market
the decentralized network of brokers and dealers who privately trade company stock outside of the major stock exchanges
decentralization
the dispersion of power concentrated in a central authority
great crash
the dramatic stock market crash of 1929 that preceded the great depression
return
the earnings from an investment
panic of 1907
the first worldwide financial crisis of the twentieth century featuring a collapse in the stock market and a run on banks and trust companies
yield
the income the investor receives from the bond, usually expressed as an annual percentage rate based on the face value of the bond
financial system
the network of markets and intermediaries that facilitates the exchange of funds
which of the following reflects the decentralization that occurred throughout the US banking system in the mid 1800s
the number of independent state banks increased dramatically
risk
the possibility of losing some or all invested funds
bartering
the practice of exchanging goods and services for other goods and services
interest
the price of borrowing money that is paid in addition to principal over the course of a loan
Elementary school students often trade food items at lunch in an effort to have the best lunch possible. In one elementary school, pudding cups have become so popular that they have become a unit of account. This means that
the price of other lunch items is expressed in quantities of pudding cups
face value
the principal portion of the loan
medium of exchange
the property of being broadly accepted in exchange for goods and services
store of value
the property of storing purchasing power over time
investment
the purchase of financial assets with the expectation that they will provide income or be sold for a higher price than originally paid
liquidity
the quality of how easily an asset can be converted into cash liquidity crisis - a shortage of available funds to meet financial needs
Muhammad is considering investing some of his hard-earned cash by opening a certificate of deposit. Muhammad is disappointed to learn that If he invests $500, he will likely only earn an additional $9 a year from today. So, he decides to invest his funds somewhere that will generate more income for him. Which of the following did Muhammad find unsatisfactory about the certificate of deposit
the return of his investment was too low
secondary market
the section of the capital market where investors buy and sell securities they already own or that have already been owned by another investor
primary market
the section of the capital market where investors buy equity-backed securities directly from firms or issuers
money supply
the total quantity of money in the economy at a given time mortgage - a type of loan made to a borrower for the purpose of purchasing a home
securities
tradable financial assets