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Macroeconomics Ch 14

Swalaheen Money, Banks, and the Federal Reserve System

QuestionAnswer
Barter Economies Economies where goods and services are traded directly for other goods and services.
Commodity money A good used as money that also has a value independent of its use of money.
Money Assets that people are generally willing to accept in exchange for goods and services or for payment of debts.
Asset Anything of value owned by a person or firm.
Functions of Money 1) Medium of exchange. 2) Unit of Account. 3) Store of Value. 4) Standard of Deferred Payment.
Unit of Account A way of measuring value of the economy in terms of money.
Liquidity The ease with which an asset can be converted into the medium of exchange. *Because money is the medium of exchange, it is the most liquid asset.
Five Criteria for a suitable Medium of Exchange Acceptable, standardized quality, durable, valuable, and divisible.
Central Bank An agency of the government that regulates the money supply.
The Federal Reserve The central bank of the United States.
Fiat Money Money, such as paper currency, that is authorized by a central bank or governmental body and that does not have to be exchanged by the central bank for gold or some other commodity money.
M1 The narrowest definition of the money supply: The sum of currency in circulation, checking account deposits in banks, and holdings of traveler's checks.
M2 A broader definition of the money supply: Includes M1 plus savings account balances, small-denominational time deposits (CDs), balances in money market deposit accounts in banks, and noninstituional money market fund shares.
Net Worth A corporation's stockholders' equity.
Reserves Deposits that a bank keeps as cash in its vault or on deposit with the Federal Reserve.
Required Reserves Reserves that a bank is legally required to hold, based on its checking account deposits
Required Reserve Ratio The minimum fraction of deposits banks are required by law to keep as reserves.
Excess Reserves Reserves that banks hold over and above the legal requirement.
Simple Deposit Multiplier The ratio of the amount of deposits created by banks to the amount of new reserves.
Fractional Reserve Banking System A banking system in which banks keep less than 100 percent of deposits as reserves.
Bank Run A situation in which many depositors simultaneously decide to withdraw money from a bank.
Bank Panic A situation in which many banks experience runs at the same time.
Discount Loans Loans the Federal Reserve makes to banks
Discount Rate The interest rate the Federal Reserve charges on discount loans.
Monetary Policy The actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives.
Monetary Policy Tools 1) Open Market Operations. 2) Discount Policy. 3) Reserve Requirements. *Most important component of money supply is checking account deposits.
Federal Open Market Committee (FOMC) The Federal Reserve committee responsible for open market operations and managing the money supply in the US.
Open Market Operations The buying and selling of treasury securities by the Federal Reserve in order to control the money supply.
Security A financial asset, such as a stock or a bond, that can be bought and sold in a financial market.
Securitization The process of transforming loans or other financial assets into securities.
The Quantity Equation Money Supply (M) multiplied by the velocity of Money (V) equals the Price Level (P) multiplied by Real Output (Y) * M x V = P x Y
Velocity of Money The average number of times each dollar in the money supply is used to purchase goods and services included in GDP. * V = (P x Y)/ M
The Quantity Theory of Money A theory about the connection between money and prices that assumes that the velocity of money is constant.
Hyperinflation Caused by central banks increasing the money supply at a rate far excess of the growth rate of real GDP.
Created by: KAzetapi
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