Money that also has value from uses other than as money, such as gold or cocoa beans, is called commodity money.
Missing Word
commodity
Commodity money is an item used as money that would be worth something even if it were not money. Gold has uses in jewelry and electronics, and cocoa beans can be eaten, which sets commodity money apart from paper money with no value of its own.
Category: Money Basics
Question 2
Current U.S. paper money is fiat money: it has no intrinsic value and is accepted because the government declares it legal tender.
Missing Word
fiat
Fiat money has no intrinsic value and is declared legal tender by the government. U.S. dollars are no longer redeemable for gold or silver, so their value rests on government decree and public trust.
Category: Money Basics
Question 3
Economists rank the items in measures of money by their liquidity, meaning how quickly and easily they can be used to buy goods and services.
Missing Word
liquidity
Liquidity is how easily an asset can be turned into spending. Currency and checking balances are the most liquid, which is why they are in M1, while less liquid assets appear only in M2.
Category: Money Basics
Question 4
Money is an imperfect store of value because inflation reduces its purchasing power over time.
Missing Word
inflation
Inflation is a general rise in prices, which means each dollar buys less later. Money still functions as a store of value, just not a perfect one.
Category: Money Basics
Question 5
A debit card instructs your bank to move funds directly from your checking account to the seller.
Missing Word
debit
A debit card works like an electronic check, transferring money that is already in your account. The money involved is the checkable deposit, not the card.
Category: Money Basics
Question 6
Funds that a bank keeps as vault cash or on deposit at the central bank, rather than lending them out, are its reserves.
Missing Word
reserves
Reserves are the part of deposits a bank holds instead of lending or investing in bonds. They let the bank meet withdrawals and any reserve requirement.
Category: Bank Balance Sheets
Question 7
On the left side of a bank's T-account, its loans, bonds and cash holdings are listed as assets.
Missing Word
assets
Assets are things of value that a bank owns, and they appear on the left side of a T-account. The right side shows liabilities, such as deposits, plus net worth.
Category: Bank Balance Sheets
Question 8
A credit union is a nonprofit institution owned and run by its members, who keep deposits there and borrow from it.
Missing Word
credit
Credit unions take deposits and make loans like banks do, but they are nonprofits owned by their members rather than by outside shareholders. They are one of the depository institutions that act as financial intermediaries.
Category: Banks and Risk
Question 9
The amount a borrower pays a lender for the use of money, on top of repaying the sum borrowed, is called interest.
Missing Word
interest
Interest is the price of borrowing. A bank earns interest on its loans and pays interest to depositors, and the gap between the two is a main source of its income.
Category: Banks and Risk
Question 10
When a borrower fails to make the promised payments on a loan, the borrower is said to default.
Missing Word
default
To default is to fail to repay a debt as agreed. Banks expect a small share of loans to default, but defaults far above that level can wipe out a bank's net worth.
Category: Banks and Risk
Question 11
A loan used to buy a home, with the home itself as collateral, is a mortgage.
Missing Word
mortgage
A mortgage is a long-term loan secured by real estate. Before the 2008 to 2009 crisis, many such loans were sold by the banks that made them and bundled into securities.
Category: Financial Crisis
Question 12
Dividing 1 by the reserve ratio gives the multiplier, the number of dollars of new money the banking system can create through lending from each dollar a bank holds beyond what it must keep.
Missing Word
multiplier
The money multiplier is 1 divided by the reserve ratio, so a 10% ratio gives a multiplier of 10. It assumes banks lend all their excess reserves and the public redeposits every loan; holding more cash or more reserves makes the real multiplier smaller.
Category: Money Creation
Question 13
Currency in circulation, part of M1, is the paper bills and coins held by the public, not by banks, the Federal Reserve or the Treasury.
Missing Word
coins
Coins and paper bills in the hands of the public are counted as currency in circulation. Cash sitting in bank vaults, at the Federal Reserve or at the Treasury is left out, because it is not available for spending by the public.
Category: Measuring Money
Question 14
A balance sheet is an accounting tool that lists what a firm owns and what it owes.
Missing Word
balance
A balance sheet lists assets on one side and liabilities on the other, and for a bank it is often drawn as a two-column T-account. Net worth is the difference between the two sides, which makes the sheet balance.
Category: Bank Balance Sheets
Question 15
A savings deposit has no fixed term and cannot be drawn on by writing a check, but its money can be withdrawn at the bank or moved easily into a checking account.
Missing Word
savings
A savings deposit is easy to reach but is not spent directly by check, which sets it apart from a checking account. Unlike a time deposit, it has no set period the money must stay in the bank.
Category: Measuring Money