Credit and Risk Quiz

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Questions and Answers

What are the three aspects of promise to pay, as per the definition of credit given in the text?

Origins, development, and uses (correct)

Industry and market changes, macroeconomic factors, and creditworthiness changes

Amount, time, and risk

Uncertainty, interest rate fluctuations, and liquidity concerns

Why does the degree of risk in credit increase with the time involved?

Long-term credit ties up funds, posing challenges if a need for liquidity arises unexpectedly

Extended periods make borrowers more vulnerable to shifts in industry trends and market conditions (correct)

Broader economic changes, such as recessions or geopolitical events, can impact long-term credit arrangements

Long-term arrangements are susceptible to changes in interest rates

What type of coinage was commonly used in the early period mentioned in the text?

Nickel or zinc

Copper or bronze

Platinum or palladium

Gold or silver (correct)

What aspect significantly affects the degree of risk in credit?

Uncertainty about the borrower’s future financial stability Signup and view all the answers

How do long-term credit arrangements impact borrowers?

They tie up funds, posing challenges if a need for liquidity arises unexpectedly Signup and view all the answers

What can impact long-term credit arrangements?

All of the above Signup and view all the answers

Which property of gold and silver made them suitable for long-term use as coins?

Durability Signup and view all the answers

What was a major problem associated with gold and silver coinage?

Transaction costs Signup and view all the answers

What has replaced gold and/or silver as the backing for the most currencies in circulation today?

Backing for currencies: fiat currency system Signup and view all the answers

Which factor contributed to the increased use of credit by consumers since World War II due to post-WWII prosperity?

Economic growth Signup and view all the answers

What makes gold and silver ideal for use as currency, facilitating trade and serving as a reliable medium of exchange?

Intrinsic value Signup and view all the answers

What was a consequence of the scarcity of both gold and silver in relation to their use as coins?

Limited money supply Signup and view all the answers

What limited economic expansion and innovation in relation to the use of fixed metal reserves?

Inhibiting economic growth Signup and view all the answers

What was a consequence of fluctuations in gold and silver values in relation to their use as coins?

Volatility in Prices Signup and view all the answers

What led to incentives for individuals and nations to hoard precious metals, reducing currency circulation?

Hoardina and Speculation Signup and view all the answers

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 Signup and view all the answers

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

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Description

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.