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Economics 201 Ch 10

Principles of Economics Ch 10

QuestionAnswer
Money Whatever is generaly accepted as a medium of exchange.
Barter The direct exchange of goods.
Fiat Money Money by Government decree of fiat (because the goernment sys that it is money).
Money is not: A resource, a good, or a service.
To make a trade by barter requires: A double coincidence of wants. You must find someonewho has what you want and who wants what you have.
The primary function of money is: To serve as a medium of exchange.
What are the functions of money? Medium of exchange, measrue of value, and store of value.
Medium of Exchange Money serves as a medium of exchange, a way to make trades more easily.
Measure of Value The value of goods, services, and resources is expressed in terms of the monetary unit.
Store of Value When we receive money, we don't have to spend it immediately.
Money is valuable because: We can trade the money for goods and services.
What are the different measures of the money supply? Currency, M1,and M2.
Currency The most basic measure of money supply and consists of the coins and paper money issued by the federal government.
M1 Consists of currency in circulation (held outside banks) plus checkable deposits. Sometimes called "tansactions money".
Checkable Deposits Deposits in banks or other financial institutions on which checks can be written.
M2 Consists of M1 plus small-demonination time deposits, savings deposits, and money market accounts.
A large percentage of transactions are make through: The use of checks and credit cards.
Checks A way to transfer the money held in a checkable deposit. It is not money.
Credit Cards Taking out a loan when making a purchase. It is not money.
Money Creation Increases in checkable deposits made possible by fractional reserve banking.
Fractional Intermediation The process by which banks make depositors'saving available ot borrowers.
Fractional Reserve System Banks hold reserves equal to only a fraction of their deposits.
Required Reserves The minimum amount of rexerves that a bank is legally required to hold against its deposits.
Reserves Vault cash plus bank deposits with the Fed.
Excess Reserves The excess of reserves over required reserves.
Potentail Deposit Multiplier = 1 / Reserve Ratio
Liquid Asset An assest that can be converted quickly into cash at a low transaction cost.
U.S. Government Securities Debt instruments issued by the federal government.
U.S. Government Securities are an attractive asset for a bank to hold because: U.S. Government Securities pay interest, are risk free, and are highly liquid.
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