Econ Chapters 10 and 11
What were early forms of paper money in the colonial period?
-Continental dollars issued to finance the Revolutionary War -Paper money printed by individuals with their state's permission -Tax anticipation notes printed by state governments
What features did national banks (the banks created in 1863 by the National Banking System) have?
-Each national bank bought some U.S. government bonds to back their own currency issue. -National banks received their operating charters from the national government. -National banks had rigorous inspections and other high standards to give people confidence in the banks.
What were problems with state bank-issued currency prior to the Civil War?
-Hundreds of different currency issued in various sizes, colors, and denominations all existed at one time. -Banks were tempted to issue too many notes because they could print more money whenever they wanted. -Counterfeiting was a problem because there were so many bank notes to copy or even invent.
Which historical events were important to the evolution of the U.S. dollar?
-It was decided to divide the dollar into tenths rather than eighths like the peso. -The triangular trade made the Spanish peso the most popular form of specie in the colonies. -Spanish pesos reminded the colonists of the Austrian talers.
What were characteristics of the Continental dollar?
-It was fiat money printed by the Continental Congress to help finance the Revolutionary War. -Nearly a quarter of a billion Continental dollars were issued during the Revolutionary War. -The currency was worthless by the end of the Revolutionary War.
How did state banks go about issuing their own currency in the period prior to the Civil War?
-State banks had their currency printed at a local print shop so that they would have money to lend. -State banks assured people that their bank's currency could be exchanged for gold or silver.
CDs as financial assets have which of the following characteristics?
-They are covered by FDIC insurance up to a $250,000 limit. -They are loans, not deposits, that individuals make to financial intermediaries like banks and credit unions. -They are usually available in different amounts and durations.
What are the characteristics of municipal bonds, or "munis"?
-They are usually tax-exempt. -They are used to finance highways, state buildings, and other public works. -They are issued by state and local governments.
Identify characteristics of derivatives.
-They can be purchased on public exchanges. -They are based on an underlying commodity.
Advantages of a mutual fund include
-a NAV price that is more stable than the price of an average share of stock. -buying into a portfolio that has already been diversified for risk.
An Individual Retirement Account (IRA) gives investors
-a tax-sheltered way to delay some income taxes until retirement. -an incentive to save for retirement.
Treasury bills, or T-bills,
-are backed by the full faith and credit of the U.S. government. -are short-term obligations with maturities under one year. -can be purchased in denominations as small as $100. -bought and sold in money markets
Treasury bonds
-are issued by the federal government. -are purchased electronically directly from the U.S. Treasury. -are available in denominations as low as $100.
Simplicity in investing means that you should
-ignore any investment that seems too complicated. -ignore any investment that seems too good to be true.
Gold Certificates and Silver Certificates were both
-issued by the federal government, and not by the National Banking System. -backed by gold or silver placed on deposit with the U.S. Treasury. -popular with the public because of their specie backing.
The advantages of a 401(k) plan include
-the fact that the plan acts as your own personal pension fund. -the ability to take your employer's contribution with you if you leave the company.
Corporate bonds are
-usually issued in large denominations of $10,000 or more. -purchased by individuals who want long-term investments.
The Federal Reserve System
-was the nation's first central bank, a "banker's bank" that could lend to other banks in times of need. -was organized as a corporation that issued stock to its member banks.
Shares of common stock, or equities, can be purchased by
-working with a stockbroker. -opening an Internet account with a brokerage firm.
M1
A Fed measure that includes coins, currency, travelers checks, DDAs, and other accounts that serve as a medium of exchange
M2
A broad Fed measure that includes coins, currency, travelers checks, DDAs, savings deposits, time deposits, and money market funds
What is the best definition of the financial system?
A network of savers, investors, and financial institutions that works together to transfer savings to investment uses
What types of specie were used in the American colonies?
Australian talers, English schillings, and Spanish pesos
Why did private banks, rather than the U.S. government, print paper currency in the years following the ratification of the U.S. Constitution?
Because everyone thought the U.S. Constitution allowed the federal government to mint metallic coins only
Why was the printing of paper currency left to the states, but not the federal government, in the period following the Revolutionary War?
Because the U.S. Constitution stated that Congress had the power to coin money, not print money
How do banks act as financial intermediaries?
By accepting small deposits and making larger loans to individuals and businesses
Why did President Roosevelt issue a series of orders that effectively denied the gold standard to American citizens in 1933?
During the uncertainty of the Great Depression, the U.S. gold stock was becoming depleted as people converted their dollars into gold.
True or false: When bonds are rated by Standard & Poor's or by Moody's, the bond's yield to maturity is of primary concern.
False
What is the role of the financial intermediary in the financial system?
Financial intermediaries pool the funds of many small savers so that larger loans can be made to borrowers.
demand deposit accounts (DDAs)
Funds deposited in a bank that can be accessed by writing a check or using a debit card
coins and currency
Includes metallic coins and paper currency issued by the Federal Reserve System
What determines a bond's final price?
Laws of supply and demand
durability
Metallic coins last about 20 years; paper currency lasts about 18 months.
store of value
Money allows you to save your purchasing power until you really need it.
measure of value
Money is a measuring stick used to express the worth of something.
medium of exchange
Money is something that all parties must accept as payment.
What is the current yield on a $1,000, 6%, 30-year bond that you just bought for $900?
More than 6.67% Reason: Divide the annual interest by the purchase price, or $60/$900 to get .0667 = 6.67%
Pension fund
Obtains its funds from employees' periodic contributions; uses its funds to make regular payments to retired or disabled workers
Finance company
Obtains its funds from installment contracts purchased from merchants; uses its funds to make relatively risky loans to consumers
Credit union
Obtains its funds from members' deposits; uses its funds to make loans to its members
Life insurance company
Obtains its funds from premiums on its policies; lends the funds to large businesses and finance companies
portability
Our currency is lightweight and convenient. You can take your currency or your checkbook anywhere.
scarcity
The Fed monitors the money supply to make sure it doesn't get too big.
Why did the United States abandon the gold standard?
The government did not have enough gold reserves to back all of the dollars that people wanted to convert into gold during the Great Depression.
divisibility
The penny is small enough for the least expensive purchase, and checks can be written for any amount.
Why was the Federal Deposit Insurance Corporation (FDIC) created in 1933?
To insure customer deposits in case of a bank failure
True or false: Early forms of paper money in the colonial period included Continental dollars, tax anticipation notes, and currency printed by private individuals.
True
True or false: In the period prior to the Civil War, state banks operated by printing their own currency at a local print shop with the assurance that people could exchange them for gold or silver if they ever lost faith in the bank.
True
barter
a moneyless economy that relies on trade
Treasury notes
are available in denominations as low as $100. have maturities of 2 to 10 years. are issued by the U.S. government.
A central bank is a ______, meaning it can lend to other banks in times of need.
banker's
The National Banking System created national banks, which were privately owned banks that received their operating ______,from the federal government. National banks bought U.S. government _____to back their national _______ hoping that rigorous bank inspections and other high standards would give people confidence in the new banking system.
charter, bonds, currency
When a country goes on the gold standard, it must be willing to
convert unlimited amounts of its currency into gold at a previously fixed price.
Diversification is a popular strategy because
declines in some stocks can be offset by increases in others.
During the course of a bank's operations, the bank accepts ______ , and pays ______ , on them.
deposits, interest
To find a bond's current yield,
divide the annual interest by the purchase price.
Money should be easily _____ to make large or small transactions, and the supply must be relatively _____ or it will lose its value.
divisible, scarce
The three functions of money include being a medium of ______, a measure of ________, and a ________ of value or purchasing power.
exchange, value, store
If something was declared to be money by government decree, it was
fiat money
Planning for your future financial needs starts with outlining your investment
goals
Commodity money is money that
has an alternative use as an economic good or commodity
Portfolio diversification is a good idea because
holding different kinds of stocks is a good way to minimize the damage that one bad stock could do to your entire portfolio.
A time or savings account pays higher ______, rates than do DDAs, in return for limiting the number of _______, you can make.
interest, withdrawls
Because the greenback had no specie backing, Congress simply declared that the notes were ______, _______ , and must be accepted as payment.
legal tender
If a bank wants to be profitable, the interest it charges on ______, must be higher than the interest it pays on _______,
loans, deposits
A barter economy is one that does not use
money
Money must be _____ so you can transfer it easily to a store or to another person, and it must be _____ so it doesn't deteriorate when handled often.
portable, durable
The Gold Standard Act of 1900 was an important milestone in U.S. history because it
put the United States on a gold standard for the very first time.
In addition to paper currency, colonists also used _______, or money in the form of silver and gold coins.
specie
The U.S. dollar got its name from the German ______ and was modeled after the Spanish _______.
talers, pesos
The federal currency issue called the greenback was created when
the Union needed to raise enormous sums to finance the Civil War.
Fiat money was money because
the gov said it was money
As the amount of Federal Reserve Notes in circulation grew,
the government had difficulty stocking gold to back the notes, so the 25% reserve was eventually removed.
U.S. government bonds have low yields because they are considered to be
the safest of all financial assets because they have almost no default risk.
The final price of a bond is established by
the supply and demand for the bond among buyers and sellers.
What things were used as commodity money during the colonial period?
tobacco, musket balls and gunpowder, and corn
Continental dollars soon fell out of favor because
too much was printed in too short a time, making it virtually worthless.