ECON MONEY AND SUPPLY

barter system

trading goods or services between two or more parties without money

money is a…

medium of exchange, store of value, and unit of account

commodity money

when a valuable goos also becomes a medium of exchange

fiat money

money that has value because the government has ordered that it is acceptable, not backed by a physical commodity

government printing too much money

causes inflation

M1

currency, demand deposits, traveler's checks, and other checkable deposits

M2

M1 plus savings accounts, certificates of deposit, and other liquid assets

debit cards

access checking and/or savings account, included in M2

credit cards

technically not a part of the economy, involves a loan made

bank reserves (fractional)

banks only hold a fraction of deposits on reserve

reasons to hold reserves

1) accommodate customer withdrawals

2) requirements by the Federal Reserve

required reserve ratio (rr)

proportion of deposits banks are required to keep on reserve

bank run cause

many depositors attempt to withdraw funds from a bank at the same time

excess reserves

reserves greater than the required amounts

excess reserves equation

total reserves - required reserves

how much money is circulating?

money supply x velocity of circulation

required reserves equation

rr x deposits

federal deposit insurance corporation

insures deposits in member banks up to a certain amount

goals of federal deposit insurance

increase bank stability and confidence

bank defaults after FDIC

shifts in confidence, following recessions and bounce backs: more confidence in the economy leads to less default mitigation

money multiplier

1/reserve ratio

loanable fund market

a hypothetical market that illustrates the market outcome of the demand for funds generated by borrowers and the supply of funds provided by lenders

real interest rate

reflects the true cost of borrowing and the true return on lending, adjusted for inflation

calculating real interest rate

nominal interest rate - expected inflation rate