Question

1. What is fiat money?

2. What is the job of the Federal Deposit Insurance Corporation (FDIC)?

3. What are the Fed Goals?

4. What is a subprime mortgage?

5. Name all the elements of M1.

6. Name all the elements of M2

Answer 1

1. Fiat money is the currency issued by the government which has no intrinsic value and its value is guaranteed by the government. The parties exchanging goods and services agreeing the value promised by the government. Paper currencies and coins issued by the modern government is an example of fiat money. U.S dollar is an example of fiat money.

2. Federal Deposit Insurance Corporation (FDIC) is an independent Government corporation of U.S government. It was established in 1933 after the bank failure during the Great Depression. It has the responsibility of insuring bank deposits in eligible banks to avoid the loss to the depositors in the event of bank failure.

One of the main roles of FDIC is to provide deposit insurance by guaranteeing safety over the depositor’s accounts up to $250,000 for each deposit in each insured bank.

It examines and supervises certain financial institution for safety and soundness and also provides certain consumer protection. The fund of the corporation is the amount of premium that the banks pay for insurance and the earnings on investment in U.S treasury securities.

It also examines whether the insured banks performance are complying with the consumer protection laws.

It responds immediately when a bank or other financial institution fails. It sells deposits and loans of the failed bank or institutions to other institutions. The customers of the failed institution will be transferred to the opted institutions. In short the FDIC is a corporation with the primary role protecting the interest of the depositors in the event of bank failure.

3. The Federal Reserve has five goals. They are maintaining stability in financial system, maintaining price stability in the economy, maintaining fullemployment, promoting economic growth, maintaining stable interest rate and exchange rate.

4. Prime mortgage is mortgage under which the lender lends money on the best credit records of the borrower. The interest on such loan is comparatively low. The subprime mortgages are loans mean to the borrowers with default credit records. The interest on such loans is higher which is meant to compensate the lenders for taking high risk.

5. M1 is the part of money supply and it includes currency and coins, demand deposits, traveler’s checks and other checkable deposits.

6. M2 includes M1+ savings deposits, money market funds, certificate of deposit and other time deposits.