Chapter 6: Money & Banking

Formulate Questions - If you had $500 to invest, what questions would you have as you decided how to invest your money? (p. 269)

1. "What should I invest my money towards?" 2. "What is a crucial priority in my life right now?"

Compare and Contrast - (a) How are mutual funds and hedge funds similar? (b) How are they different? (p. 269)

A mutual fund pools the savings of many individuals and invests this money in a variety of stocks, bonds, and other financial assets. A hedge fund is a private investment organization that employs risky strategies that often make huge profits for investors. Both funds are similar because they fall under financial intermediaries (institutions that help channel funds from savers to borrowers).

Define - What does it mean to say that money is an acceptable form of payment? (p. 233)

A person that accepts money as a form of payment can use it for something else.

Distinguish - What is the difference between the federal funds rate and the discount rate? (p. 254)

Banks lend money to each other on a day-to-day basis using money from reserve balances. The interest rate the bank charges is the federal funds rate. The banks also borrow from the federal reserve when they do this the rate is discount.

Identify Central Ideas - What role do financial intermediaries play in the free enterprise system? (p. 269)

Financial intermediaries help channel funds from savers to borrowers.

Identify Central Ideas - What role do households play in the financial system? (p. 269)

In the financial system, households, individuals, and small businesses lend out their savings in return for financial assets. Households play the role of an investor.

Summarize - (a) What kinds of money are included in M1 and M2? (b) Why do economists use these different categories? (p. 262)

M1 represents money that people can gain access to easily and consists of assets and liquidity. M2 consists of all of M1's assets plus several additional assets. They make up the money supply of the US.

Explain - Why do objects used as money need to be in limited supply? (p. 233)

Objects used as money need to be in limited supply in order to maintain its value.

Compare and Contrast - What is one disadvantage of bartering over using currency to purchase goods? (p. 233)

One disadvantage is the absence of a proper and convenient means of storing wealth or value.

Summarize - Describe a situation in which a person would need a mortgage from a bank. (p. 262)

One situation would be where a person wants to buy some real estate and can't afford the total cost. They would take out a mortgage loan for the cost of the house minus the deposit.

Synthesize - How has the role of the Federal Reserve System changed over time? (p. 254)

The Federal Reserve System has changed through monetary policy.

Identify Cause & Effect - What was one effect of President Jackson's veto of the Second Bank of the United States? (p. 240)

The Free Banking Era begins.

Summarize - What are the three key functions of a central bank? (p. 254)

The central bank makes banks sound safe, provides money and services for the banks, and is responsible for promoting a healthy economy using monetary tools.

Cite Evidence - How does the structure of the Fed address the concern that having a central bank gives the federal government too much power? (p. 254)

The federal reserve system represents compromises between central power and regional power. The board of governors have 14 year terms.

Describe - What was the gold standard? (p. 240)

The gold standard was a monetary system in which paper money and coins had the value of certain amounts of gold.

Make Generalizations - What relationship does risk have to return? (p. 269)

The government does not insure you against the risk of an investment gone bad. You may benefit from the rewards of a good investment, but you face the risks of a bad one.

List - What are the six characteristics of money? (p. 233)

The six characteristics of money include: durability; portability; divisibility; uniformity; limited supply; acceptability.

Identify Supporting Details - List at least three reasons savings are important. (p. 262)

The three reasons that savings are important include: saving for future use; our goals change as we move through life; home and vehicle.

Summarize - What were the effects of the government policies that limited people's ability to redeem paper money for gold during the Depression? (p. 240)

There was an increase in gold value and decrease in the value of the dollar.

Summarize - What did the federalists, led by Alexander Hamilton, believe about the new nation's system of banking? (p. 240)

They believed that a centralized banking system was key to promoting industry and trade.

Integrate Information - How do the laws of supply and demand affect money? (p. 254)

Too much money in the economy leads to inflation and the higher interest rate, the lower demand for money.

Draw Inferences - What might be the consequences of failing to budget or build a credit plan? (p. 262)

Two examples of consequences include damaging your credit and putting yourself in debt.

Apply Concepts - If you write your friend an IOU for a loan of twenty dollars, what type of money have you given her? (p. 233)

You have given her Representative Money.

Determine Central Ideas - When would you pay interest? (p. 262)

You pay interest when you borrow money.