TEST BANK Economics Test: Money, Banking 2024 EXAM WITH VERRIFIED ANSWERS

4.) Uniformity
-all money looks the same: people must be able to count and measure money accurately-
5.) Limited Supply
-There is a limited supply of usable money-
6.) Acceptability
-Everyone in the economy can exchange money for goods and services-

Three Types of Money - CORRECT ANSWERS-1.) Commodity Money
-An object that serves as currency-
Ex: corn, cattle, wheat
2.) Representative Money
-Something that represents money at a later time-
Ex: IOU, receipts for gold or silver, bills of credit
3.) Fiat Money
-Money that has value b/c the got says it has value-
Ex: Federal Reserve Notes

What are the three primary goals/missions of the Federal Reserve? - CORRECT ANSWERS-1.) Maintain the public's trust in the banking system
2.) Promote stable and growing economy
3.) Keep Inflation Manageable

What is the structure of the Federal Reserve? - CORRECT ANSWERS-Board of Governors: Set federal policies and testify before congress
Federal Open Market Committee: Buy/Sell government securities
Regional Banks: Move money in and out of circulations and supervise commercial banks

What are the three ways in which the Fed can control the amount of money in circulation? - CORRECT ANSWERS-1.) Open Market Operation: buy/sell securities
2.) Change Reserve Requirements: changes money circulation
3.) Change Discount Rate: lower the rate @ the trough and raise the rate @ the peak
Three Uses of Money - CORRECT ANSWERS-1.) Medium of Exchange
-Anything that is used to determine value during the exchange of goods and services-
2.) Unit of Account
-A mean for comparing the values of goods and services-
3.) Store of Value
-Something that keeps its value if it is stored rather than used-

Six Characteristics of Money - CORRECT ANSWERS-1.) Durability
-Money lasts
a long time and can withstand wear and tear-
2.) Portability
-People can take their money whenever they need to go-
3.) Divisibility
-Can be divided into smaller denominations-

What is the difference between M1 and M2? - CORRECT ANSWERS-M1: money that people can access immediately to pay for goods and services
*has liquidity: the ability to be used or directly accounts converted into cash
M2: M1+additional assets...called 'near money'
*deposits in savings accounts, money market mutual funds, time deposits savings accounts

In times of inflation, would the Fed increase or decrease the money supply? - CORRECT ANSWERS-Peak/ Deflation/ Contraction: Increase money supply (buy gas)
*loose monetary policy*
Trough/ Expansion/ Inflation: Decrease money supply (sell gas)
*tight monetary policy*

What mistake did the Fed make as the Great Depression started? - CORRECT ANSWERS-They refused to add money into the economy...they shrank money supply
Also: -banks loaned large sums of money to high risk businesses
-farmers were unable to pay back loans due to crop failure

What major reform emerged from the Great Depression that increased public confidence in the banks? Why was this reform so important? - CORRECT ANSWERS--FDIC: agency that insures a customer’s deposits if bank fails