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Unit 3: Money


Medium of Exchange Any item sellers generally accept and buyers generally use to pay for a good or service; money; a convenient means of exchanging goods and services without engaging in barter.
Store of Value An asset set aside for future use; one of the three functions of money.
Asset Demand for Money The amount of money people want to hold as a store of value; 1/interest rate
Money Market The market in which the demand for and the supply of money determine the interest rate (or the level of interest rates) in the economy.
Unit of Account A standardized unit in which prices can be stated and the value of goods and services can be compared; one of the three functions of money
M1 The most narrowly defined money supply, equal to the currency in the hands of the public and the checkable deposits of commercial banks and thrift institutions.
M2 A more broadly defined money supply, M2= M1+Saving Deposits (MMDAs)+small time deposits+MMMFs
M3 A very broadly defined money supply, M3=M2+large time deposits (100,000+)
Total Demand for Money Transactions Demand for Money+Asset Demand for Money
Required Reserve The funds that banks and thrifts must deposit with the Federal REserve Bank (or hold as vault cash) to meet the legal reserve requirement; a fixed percentage of the bank's or thrift's checkable deposits
Reserve Ratio Commercial bank's required reserves/ Commercial bank's checkable-deposit liabilities
Excess Reserve Actual reserves-Required reserves
Federal Funds Rate The interest rate banks and other depository institutions charge one another on overnight loans made out of their excess reserves
Money Multiplier 1/required reserve ratio
Open Market Operations The buying and selling of U.S government securities by the Federal Reserve Banks for the purposes of carrying out monetary policy.
Discount Rate The interest rate that the Federal Reserve Banks charge on the loans they make to commercial banks and thrift institutions
Easy Money (Expansionary Monetary Policy) Federal Reserve Banks makes banks loans less expensive and more available and thereby increase aggregate demand, output and employment. Fed buys securities, lowers reserve ratio and lowers the discount rate
Tight Money (Restrictive Monetary Policy) Federal Reserve Bank tightens supply of money in order to reduce spending and control inflation. Fed sells securities, increases the reserve ratio and raises the discount rate.
Prime Interest Rate The benchmark interest rate that banks use as a reference point for a wide range of loans to businesses and individuals.
Velocity of Money The number of times per year the average dollar is spend on goods and services.
Phillips Curve A curve showing the relationship between the unemployment rate (x-axis) and the annual rate of increase in the price level (y-axis).
Laffer Curve A curve relating the government tax rates and tax revenues and on which a particular tax rate (between zero and 100 percent) maximizes tax revenues.
Aggregate Supply Shocks Sudden, large changes in resource costs that shift an economy's aggregate supply curve
Created by: lanngoctran