16 Questions
What are the three aspects of promise to pay, as per the definition of credit given in the text?
Origins, development, and uses
Why does the degree of risk in credit increase with the time involved?
Extended periods make borrowers more vulnerable to shifts in industry trends and market conditions
What type of coinage was commonly used in the early period mentioned in the text?
Gold or silver
What aspect significantly affects the degree of risk in credit?
Uncertainty about the borrower’s future financial stability
How do long-term credit arrangements impact borrowers?
They tie up funds, posing challenges if a need for liquidity arises unexpectedly
What can impact long-term credit arrangements?
All of the above
Which property of gold and silver made them suitable for long-term use as coins?
Durability
What was a major problem associated with gold and silver coinage?
Transaction costs
What has replaced gold and/or silver as the backing for the most currencies in circulation today?
Backing for currencies: fiat currency system
Which factor contributed to the increased use of credit by consumers since World War II due to post-WWII prosperity?
Economic growth
What makes gold and silver ideal for use as currency, facilitating trade and serving as a reliable medium of exchange?
Intrinsic value
What was a consequence of the scarcity of both gold and silver in relation to their use as coins?
Limited money supply
What limited economic expansion and innovation in relation to the use of fixed metal reserves?
Inhibiting economic growth
What was a consequence of fluctuations in gold and silver values in relation to their use as coins?
Volatility in Prices
What led to incentives for individuals and nations to hoard precious metals, reducing currency circulation?
Hoardina and Speculation
What has allowed central banks to implement responsive monetary policies, unlike when currencies were tied to gold?
Flexibility: allows central banks to implement responsive monetary policies
Study Notes
Credit and Risk
- Three aspects of promise to pay: ability, willingness, and performance
- Degree of risk in credit increases with time involved due to greater uncertainty about the future
Early Coinage
- Commonly used coinage in early period: gold and silver
Risk Factors in Credit
- Aspect that significantly affects degree of risk in credit: time involved
- Long-term credit arrangements can lead to borrower's dependence on the lender and reduced financial flexibility
Impact on Credit Arrangements
- Factors that can impact long-term credit arrangements: economic downturns and changes in interest rates
Properties of Gold and Silver
- Property that made gold and silver suitable for long-term use as coins: durability
- Gold and silver are ideal for use as currency due to their durability, portability, and divisibility
Challenges with Gold and Silver Coinage
- Major problem associated with gold and silver coinage: scarcity
- Consequence of scarcity: limited economic expansion and innovation
- Fluctuations in gold and silver values led to inflation and deflation
- Fluctuations also led to incentives for individuals and nations to hoard precious metals, reducing currency circulation
Modern Currency System
- Fiat currency has replaced gold and/or silver as the backing for most currencies in circulation today
- Central banks can implement responsive monetary policies due to fiat currency, unlike when currencies were tied to gold
Test your knowledge of credit and risk with this quiz. Explore the aspects of promise to pay and the impact of time on the degree of risk in credit.
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