assets that people are generally willing to accept in exchange for goods and service or for payment of debts
money
anything of value owned by a person or firm
asset
a good used as money that also has value independent of its use as money
commodity money
4 functions of money
1. medium of exchange
2. unit of account
3. store of value
4. standard of deferred payment
money serves as a _________________ when sellers are willing to accept it in exchange for good or services
medium of exchange
________________ a way of measuring value in the economy in terms of money (once a single good is used as money, each good has a single price rather than many prices)
unit of account
________________: money allows value to be stored easily: if you do not use all your dollars to buy good and services today, you can hold the rest to use in the future
store of value
Why do people use money instead of assets or bonds?
liquidity
ease with which an asset can be converted into a medium of exchange
liquidity
____________________: money can facilitate exchange at a given point in time by providing a medium of exchange and unit of account
standard of deferred payment
what 5 criteria make a good suitable for use as a medium of exchange?
1. acceptable
2. standardized quality
3. durable
4. valuable
5. divisible
what is the problem with commodity money (gold)?
its value depends on its purity
money, such as paper that is authorized by a central bank or governmental body that does not have to be exchanged by the central bank for gold or some other commodity money
fiat money
the narrowest definition of the money supply: the sum of currency in circulation, checking account deposits in banks, and holding in traveler's checks
M1
M1 includes what 3 things?
1. Currency
2. value of all "checking account deposits" at a bank
3. the value of "traveler's checks
where is 60% of US currency?
outside the borders of the US, most are held by households and firms in countries where there is not much confidence in the local currency
a broader definition of money supply: it includes M1 plus savings account balances, small denomination time deposits, balances in money market deposit accounts in banks, and noninstitutional money market fund shares
M2
M2 includes what 5 things?
1. M1
2. savings account deposits
3. small-denomination time deposits
4. CD's
5. noninstitutional money market fund shares
on a balance sheet a firm's _____________ or an the left and its ____________ are on the right
assets
liabilities
the value of anything owned by the firm,
assets
the value of anything the firm owes
liabilities
difference between the total value of assets and total value of liabilities; represents the value of the firm if it had to be closed, all its assets were sold, and all its liabilities were paid off
stockholder's equity (net worth)
deposits that a bank keeps as cash in its vault or on deposit with the Federal Reserve
Reserves
reserves that a bank is legally required to hold, based on its checking account deposits
Required reserves
the minimum fraction of deposits banks are required by law to keep as reserves
Required reserve ratio
reserves that banks hold over and above the legal requirement
Excess reserves
banks are required by law to keep as reserves ___________ percent of their checking account deposits above a threshold level
10%
simple deposit multiplier
1/RR
change in checking account deposits =
change in bank reserves X 1/RR
a banking system in which banks keep less than 100% of deposits as reserves
fractional reserve banking system
a situation in which many depositors simultaneously decide to withdraw money from a bank
bank run
a situation in which many banks experience runs at the same time
bank panic
a central bank, like the Federal Reserve in the United States, can help stop a panic by acting as a ___________________
lender of last resort
loans the Federal Reserve makes to banks
Discount loans
the interest rate the Federal Reserve charges on discount loans
Discout rate
what are the 3 monetary policy tools the Fed uses to manage the money supply?
1. Open market operations
2. Discount policy
3. Reserve requirements
the federal reserve committee responsible for open market operations and managing the money supply in the US
FOMC (Federal Open Market Committee)
the buying and selling of Treasury securities by the Federal Reserve in order to control the money supply
Open Market Operations
by lowering the discount rate, the Fed can encourage banks to take additional loans and thereby increase their reserves. more reserves will increase the _____________________
money supply
suppose a bank has $100 million in checking account deposits, and the RR ratio is 10%. the bank will be required to hold ______________ as reserves. if the RR ratio is 8, the bank will only need to hold _______________
$10 million, $8 million, $2 million is available to lend out
a financial asset--such as a stock or bond--that can be bought and sold in a financial market
security
the process of transforming loans or other financial assets into securities
securization
Quantity equation
M(money supply) x V(velocity) = P(price level) x Y(real output)
the average number of times each dollar in the money supply is used to purchase good and services included in GDP
Velocity of Money
Velocity =
P x Y/ M
Inflation Rate =
Growth Rate of the Money Supply (M) - Growth Rate of Real Output (P)
if the money supply grows at a faster rate than real GDP, there will be ______________
inflation
if the money supply grows at a slower rate than real GDP, there will be ______________
deflation
if the money supply grows at the same rate as real GDP, the price level will be _______________
stable