Money
is anything that serves as a medium of exchange
medium of exchange
is anything that is widely accepted as a means of payment
Barter
an individual exchanges goods directly for other goods
unit of account
is a consistent means of measuring the value of things
-it is a constant value. If someone asked you how much you paid for an item, you wont be able to tell them 5 pizzas because the value of 5 pizzas can be anything
store of value
is an item that holds value over time
-you leave $20 in your coat pocket, 2 years late you come back to that dollar and it still has value. value has been "stored
functions of money
-medium of exchange
-a unit of account
-a store of value
Commodity money
is money that has value apart from its use as money.
E.g. Mackerel in federal prisons could be used to buy services from other prisoners or eaten, gold, and silver can be used as jewlery
-DISADVANTAGE - quantity of money can fluctuate erratically
Fiat money
is money that some authority, generally a government, has ordered to be accepted as a medium of exchange.
E.g. paper money and coins in the U.S. "this note is legal tender for all debts public and private
Currency
is paper money and coins.
Checkable deposits
are balances in checking accounts.
-i.e. swipping your debit card, the money transferred is the checkable deposit
A check
is a written order to a bank to transfer ownership of a checkable deposit
Money supply
the total quantity of money in the economy at any one time.
Liquidity
is the ease with which an asset can be converted into currency.
M1
is the narrowest of the Fed's money supply definitions that includes currency in circulation, checkable deposits, and traveler's checks.
-PERFECTLY LIQUID
M2
is a broader measure of the money supply than M1 that includes M1 and other deposits like small savings accounts
-HIGHLY LIQUID BUT NOT AS LIQUID
financial intermediary
is an institution that amasses funds from one group and makes them available to another.
A bank
is a financial intermediary that accepts deposits, makes loans, and offers checking accounts
A balance sheet
is a financial statement showing assets, liabilities, and net worth.
Assets
are anything of value.
Liabilities
are obligations to other parties.
Net worth
refers to assets less liabilities.
Reserves
are bank assets held as cash in vaults and in deposits with the Federal Reserve.
fractional reserve banking system
is a system in which banks hold reserves whose value is less than the sum of claims outstanding on those reserves
Required reserves
are the quantity of reserves banks are required to hold.
required reserve ratio
is the ratio of reserves to checkable deposits a bank must maintain.
Excess reserves
are reserves in excess of the required level
loaned up
when a bank's excess reserves are zero
the deposit multiplier
the ratio of the maximum possible change in checkable deposits (?D) to the change in reserves (?R)
Md= ?D�?R
regulations of banks
-banks are highly regulated
1. deposit ensured
2.FDIC audit banks to make sure they are operating safely, i.e. not making too risky investments, maintaining a level of networth
central bank
is a bank that:
1.acts as a banker to the central government
2.acts as a banker to banks
3.acts as a regulator of banks
4.conducts monetary policy
5.supports the stability of the financial system
Powers of the Fed
1. setting reserve requirements
2. operating the discount window and other credit facilities. (Is the fed's ability to lend reserves to banks)
3. conducting open-market operations
discount rate
is interest rate charged by the fed when they lends reserves to banks who fall short on their reserves.
federal funds market
an alternative to borrowing from the fed's reserves
IS A MARKET IN WHICH BANKS LEND RESERVES TO ONE ANOTHER
federal funds rate
is the interest rate charged for loans in the federal funds market
open-market operations
the buying and selling of federal government bonds by the fed
bond
is a promise by the issuer of the bond to pay the owner of the bond a payment or a series of payments on a specific date or dates