Econ Unit 4 Exam Review

If you decide to put aside cash in a bank account today so you can buy a car in the future, which main function of money are you using?

• Means of exchange

• Unit of measurement

• Store of value

• Medium of transfer

What kind of money has no physical backing but is accepted as legal tender because of government decree?

• Commodity money like gold or silver

• Currency backed by precious metals

• Fiat money like paper bills and coins

• Barter items such as livestock or crops

The fact that you can easily keep cash in your wallet or purse highlights which feature of money?

• Portability

• Divisibility

• Durability

• Acceptability

Regarding the money supply categories, which of these is true?

• M2 includes some assets that aren’t as easily converted to cash as those in M1

• M1 is larger and includes all assets found in M2

• M2 consists mostly of coins and bills in circulation

• M1 is backed by government bonds, but M2 isn’t

When an investor spreads $1,000 equally across several stocks instead of putting all of it into one company, what investment principle are they applying?

• Risk avoidance

• Portfolio diversification

• Financial leverage

• Capital preservation

Certificates of Deposit (CDs) are popular because they:

• Offer flexible withdrawal options without penalties

• Typically require low initial deposits and allow you to choose a length of maturity

• Are backed by the stock market performance

• Provide variable interest rates tied to inflation

Which of the following statements accurately describes the role of money or financial assets?

• Money only serves as a medium of exchange and nothing else

• Checking accounts are highly liquid and function like cash

• Bonds represent ownership shares in a corporation

• M1 money supply includes savings accounts and money market funds

Which entities commonly issue municipal bonds that investors receive tax benefits from?

• Commercial lending institutions

• Federal agencies

• State and local governments

• Private corporations

Junk bonds are considered risky investments mainly because:

• They are issued by financially unstable companies with higher default chances (=higher risk)

• They pay very low interest rates compared to other bonds

• They are backed by government guarantees

• They require long-term commitments with no liquidity

Which pair of financial products represents the extremes of investment risk?

• Treasury bills and stocks

• Savings accounts and corporate bonds

• Stocks and junk bonds

• CDs and municipal bonds