module 22-25

national savings

the sum of private savings and the budget balance, is the total amount of savings generated within the economy

private savings

equal to disposable income minus consumer spending, is disposable income that is not spent on consumption

transaction costs

the costs that parties incur in the process of agreeing to and following through on a bargain

liquid assets

cash and items that can be quickly converted to cash

financial intermediary

an institution that transforms the funds it gathers from many individuals into financial assets


A share of ownership in a corporation.


a formal contract to repay borrowed money with interest at fixed intervals

savings-investment identity

savings and investment spending are always equal for the economy as a whole


a financial intermediary that provides liquid assets in the form of bank deposits to lenders and uses those funds to finance the illiquid investment spending needs of borrowers

mutual fund

fund that pools the savings of many individuals and invests this money in a variety of stocks, bonds, and other financial assets


currency, demand deposits, traveler's checks, and other checkable deposits


All of M1 + less immediate (liquid) forms of money to include savings, money market mutual funds, and small denomination time deposits.


The broadest component of the money supply. Equal to M2 plus large time deposits.

medium of exchange

is an asset that individuals acquire for the purpose of trading goods and services rather than for their own consumption

store of value

a means of holding purchasing power over time

unit of account

a measure used to set prices and make economic calculations

fiat currency

Legal tender, especially paper currency, authorized by a government but not based on a gold standard or silver standard

time value of money

the increase of an amount of money due to earned interest or dividends

future value formula

FV=PV(1+r)^n; the future value of some current amount of money is the amount to which it will grow as interest accumulates over a specified period of time

present value formula

PV=FV/(1+r)^n; present value of $1 realized one year from now is $1/(1+r): the amount of money you must lend out today in order to have $1 in one year. It is the value to you today of $1 realized one year from now.

deposit insurance

guarantees that a bank's depositors will be paid even if the bank can't come up with the funds, up to a maximum amount per account

reserve ratio

the fraction of deposits that banks hold as reserves

required reserves

is the smallest fraction of deposits that the Federal Reserve requires banks to hold

excess reserves

a bank's reserves over and above its required reserves

money multiplier

the ratio of the money supply to the monetary base. It indicates the total number of dollars created in the banking system by each $1 addition to the monetary base

deposit creation

the process by which a fractional reserve banking system turns $1 of bank reserves into several dollars of bank deposits