Chapter 14 Key Terms - Money and Banking

ample reserves

When banks are holding an amount of reserves significantly above the minimum required amount, generally a choice made by banks during and after the Great Recession

asset

An item of value that a firm or an individual owns

asset-liability time mismatch

Customers can withdraw a bank's liabilities in the short term, while customers repay its assets in the long term

balance sheet

An accounting tool that lists assets and liabilities

bank capital

a bank's net worth

barter

literally, trading one good or service for another, without using money

coins and currency in circulation

the coins and bills that circulate in an economy that are not held by the U.S Treasury, at the Federal Reserve Bank, or in bank vaults

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

credit card

immediately transfers money from the credit card company's checking account to the seller, and at the end of the month, the user owes the money to the credit card company; a credit card is a short-term loan

debit card

Like a check, it is an instruction to the user's bank to transfer money directly and immediately from your bank account to the seller

demand deposit

A checkable deposit in banks that is available by making a cash withdrawal or writing a check

depository institution

An institution that accepts money deposits and then uses these to make loans

diversify

making loans or investments with a variety of firms, to reduce the risk of being adversely affected by events at one or a few firms

double coincidence of wants

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

fiat money

has no intrinsic value, but is declared by a government to be the country's legal tender

financial intermediary

An institution that operates between a saver with financial assets to invest and an entity that will borrow those assets and pay a rate of return

liability

any amount or debt that a firm or an individual owes

limited reserves

When banks are holding an amount of reserves that is at or only slightly above the minimum required amount, generally a choice made by banks before the Great Recession

M1 money supply

A narrow definition of the money supply that includes currency and checking accounts in banks, and to a lesser degree, traveler's checks.

M2 money supply

a definition of the money supply that includes everything in M1, but also adds savings deposits, money market funds, and certificates of deposit

medium of exchange

Whatever is widely accepted as a method of payment

money

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

money market fund

The deposits of many investors are pooled together and invested in a safe way, like short-term government bonds

money multiplier formula

The formula used to determine the total amount of M1 money supply created in the banking system, equal to 1/reserve ratio

net worth

The excess of the asset value over and above the amount of the liability; total assets minus total liabilities

payment system

helps an economy exchange goods and services for money or other financial assets

reserves

funds that a bank keeps on hand and that it does not loan out or invest in bonds

savings deposit

bank account where you cannot withdraw money by writing a check, but can withdraw the money at a bank, or can transfer it easily to a checking account

smart card

stores a certain value of money on a card, and then one can use the card to make purchases

standard of deferred payment

Money must also be acceptable to make purchases today that will be paid in the future

store of value

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

T-account

a balance sheet with a two-column format, with the T-shape formed by the vertical line down the middle and the horizontal line under the column headings for "Assets" and "Liabilities"

time deposit

An account that the depositor has committed to leaving in the bank for a certain period of time, in exchange for a higher rate of interest; also called a certificate of deposit

transaction costs

The costs associated with finding a lender or a borrower for money

unit of account

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