Money and Banking Flashcards

This set of vocabulary flashcards covers defining money, the measurement of the money supply, and the fundamental roles and risks associated with banking as discussed in Chapter 14.

Money

Whatever serves society in four functions: medium of exchange, store of value, unit of account, and standard of deferred payment.

Medium of exchange

Whatever is widely accepted as a method of payment.

Store of value

Something that serves as a way of preserving economic value that one can spend or consume in the future.

Unit of account

The common way in which we measure market values in an economy.

Standard of deferred payment

The requirement that money must be acceptable to make purchases today that will be paid in the future.

Barter

Trading one good or service for another, without using money.

Double coincidence of wants

A situation in which two people each want some good or service that the other person can provide.

Commodity money

An item that is used as money, but which also has value from its use as something other than money.

Commodity-backed currencies

Dollar bills or other currencies with values backed up by gold or another commodity.

Fiat money

Money that has no intrinsic value but is declared by a government to be the country's legal tender; in the U.S., its only backing is universal faith and trust.

M1 money supply

A narrow definition of money that includes currency in circulation, checkable (demand) deposits, and savings deposits.

M2 money supply

A broad definition of money that includes everything in M1, plus money market funds, Certificates of Deposit ($CD$’s), or other time deposits.

Total M1 (May 2021)

$19,221$ billion U.S. dollars.

Total M2 (May 2021)

$20,368$ billion U.S. dollars.

Debit card

An instruction to the user’s bank to transfer money directly and immediately from the user's bank account to the seller.

Credit card

A tool that immediately transfers money from the credit card company’s checking account to the seller, functioning as a short-term loan.

Smart card

A card that stores a certain value of money to make purchases, such as a RamCard.

Financial intermediaries

Institutions like banks that link savers and borrowers, making profits by charging higher interest on loans than they pay on deposits.

Balance sheet

An accounting tool that lists assets and liabilities.

Asset

An item of value that a firm or an individual owns.

Liability

Any amount or debt that a firm or an individual owes.

Net worth

The excess of asset value over liabilities; calculated as total assets minus total liabilities.

Bank capital

A bank’s net worth.

Reserves

Funds that a bank keeps on hand and does not loan out or invest in bonds.

Reserve requirement

The fraction of deposits that a bank must keep as reserves.

Default risk

The risk that loan defaults will lower a bank's assets and net worth.

Liquidity risk

The risk arising because deposits can be withdrawn at any time whereas loans are illiquid and cannot be called for immediate repayment.

Asset-liability time mismatch

A situation where a bank's liabilities can be withdrawn in the short term while its assets are repaid in the long term.

Silicon Valley Bank (SVB)

A bank largely serving venture capital firms that failed on Friday, March 10, 2023, marking the second biggest commercial bank collapse in US history.

Signature Bank

A New York bank, heavy in venture capital and cryptocurrency, that failed on Sunday, March 12, becoming the 3rd largest commercial bank failure in US history.

Systemic risk

A risk that poses a threat to the entire financial system.

Moral hazard

The risk that bailing out bad behavior (like paying all depositors regardless of limits) might incentivize banks to take more risk.