macro 4.3-3.5

Money

Any asset that can easily be used to purchase goods and services.

Money supply

The total value of financial assets in the economy that are considered money.

Medium of exchange

An asset acquired for the purpose of trading for goods and services rather than for 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.

Commodity money

A good used as a medium of exchange that has intrinsic value in other uses.

Commodity-backed money

A medium of exchange with no intrinsic value, guaranteed to be convertible into valuable goods.

Flat money

A medium of exchange whose value derives entirely from its official status as a means of payment.

Monetary aggregate

An overall measure of the money supply.

Monetary base (M0 or MB)

The total amount of currency in circulation or kept on reserve by commercial banks.

M1

The monetary aggregate that includes currency in circulation, checkable bank deposits, and other liquid deposits.

M2

The monetary aggregate that includes M1 plus less liquid “near monies” that can be readily converted into cash.

Central bank

A government institution that issues currency, oversees and regulates the banking system, and implements monetary policy.

Open market operation (OMO)

A purchase or sale of government debt (bond) by the Fed.

Fractional reserve banking system

A system where only a fraction of bank deposits are backed by cash on hand.

Bank reserves

The currency that banks hold in their vaults plus their deposits at the central bank.

Reserve ratio

The fraction of bank deposits that a bank holds as reserves.

Required reserve ratio

The smallest fraction of deposits that the Central Bank requires banks to hold.

Reserve requirements

Rules set by the central bank that determine the required reserve ratio for banks.

Required reserves

The reserves that banks must hold as mandated by the central bank.

Excess reserves

A bank's reserves over and above its required reserves.

Money multiplier

The ratio of the money supply to the monetary base, indicating the total dollars created by each $1 addition to the monetary base.

Money market

The supply and demand for the equilibrium price of money, where borrowers and lenders agree to short-term loans.

Money demand curve

Shows the relationship between the quantity of money demanded and the nominal interest rate.

Money supply curve (MS)

Shows the relationship between the quantity of money supplied and the nominal interest rate, represented as a vertical line.

Equilibrium interest rate

The interest rate at which the money demand curve intersects the money supply curve.

Loanable funds model

The real interest rate that matches the quantity of loanable funds supplied by savers with the quantity of loanable funds demanded for investment spending.