Money
any asset that can easily be used to purchase goods and services
Currency in circulation
cash held by the public
Checkable Bank Deposits
bank accounts on which people can write checks
Money Supply
total value of financial assets in the economy that are considered money
Currency in Circulation + Checkable Bank Deposits + Travelers Checks
Medium of exchange
an asset that individuals acquire for the purpose of trading rather than for their own consumption
Store of Value
a means of holding purchasing power over time
Unit of Accounting
Measure used to set prices and make economic calculations
Commodity Money
good used as a medium of exchange such as gold or silver
Commodity Backed Money
medium of exchange with no intrinsit value whose ultimate value is guaranteed by a promise that it can be converted into valuable goods
Fiat Money
medium whose value derives entirely form its official status as a means of payment (US)
M1
consists of assets you can use to buy groceries: currency, travelers checks, cheachable deposits
M2
M1 + financial assets like stocks and bonds not part of money supply because it is not liquid enough
Banks
financial intermediaries that use liquid assets in the form of bank deposits to finance the illliquid investmetns of borrowers
Bank Reserve
(not part of money supply)
currency banks hold in their vaults plus their deposits at the federal reserve
Reserve Ratio
the fraction of money the bank holds as reserves (banks only hold a fractionof their deposits as reserves becasue on any given day only a fraction of depositers will withdraw their funds)
reserve ratio 10% by law
Assets for Banks
Loans and reserves
7% assets required by law for banks
Liabilities for Banks
deposits (what the bank owes people)
Bank Run
too many depositers at the same time due to fe3ar of bank failure
Deposit Insurance
prevents bank runs and ensures depositers up to $250,000
Capital Requirements
regulators require that owners of banks hold substantially more assets than the value of bank deposits (7%)
Reserve Requirements
rules set by the federal reserve that set a minimum reserve ratio (10%)
Discount Window
arrangement with the federal reserve that it will stand ready to lend money to banks in trouble
Determining Money Supply
1. remove currency from circulation (to vaults, lower money supply)
2. create money by accepting deposits and making loans (make money supply larger)
Excess Reserves
money held at bank beyond reserve requirements
Monetary Base
sum of currency in circulation and bank reserves
Money Multiplier
ratio of the money supply to the monetary base
Central Bank
oversees and regulates the bankign system and controls the monetary base
Federal Reserve
a central bank--an institution that oversees and regulates the banking system and controls the monetary base (12 banks)
Federal Open Market Commitee (FOMC)
policy making board of the federal reserve
Federal Funds Market
allows banks that fall short of the reserve requirement to borrow funds from banks with excess reserves
Federal Funds Rate
interest rate determined in the federal funds market
Discount rate
rate of interest the federal reserve charges on loans to banks (normally 1% higher)
Open-Market Operation
conducted by FOMC
made up of 7 members of Board of governors
principle tool of monetary policy: the fed can increase or reduce the monetary base by buyign governmetn debt from banks or selling gov't debt to banks in the form of treasure bills