Money, Banking & the Fed Today

Flashcards of key vocabulary terms about Money, Banking, and the Federal Reserve

Money

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

Currency in circulation

Cash held by the public.

Checkable bank deposits

Bank accounts on which people can write checks.

Money supply

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

Medium of Exchange

Something people accept as payment for goods and services (an asset that individuals acquire for the purpose of trading rather than for their own consumption).

Store of Value

Enables people to save the money they earn today and use it to buy the goods and services they want tomorrow.

Unit of Account

A way of measuring value in an economy

Commodity Money

A good used as money that has intrinsic value in some other use.

Commodity-Backed Money

A medium of exchange with no intrinsic value whose ultimate value is guaranteed by a promise that it can be converted into valuable goods.

Fiat Money

Money whose value is derived entirely from its official status as a means of payment.

M1

Currency in circulation, checkable bank deposits, and traveler’s checks.

M2

M1 plus savings accounts, money market accounts, and other near monies.

Money market funds

Low risk low return investment; mutual funds that invest only in liquid assets; similar to bank deposits.

Fractional reserve banking system

A banking system in which banks hold only a fraction of deposits as reserves.

Bank run

A phenomenon in which many of a bank’s depositors try to withdraw their funds simultaneously.

FDIC

Federal Deposit Insurance Corporation. Guarantees the first $250,000 of each account.

Excess reserves

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

Monetary base

Currency in circulation + bank reserves.

Money multiplier

money supply / monetary base.

Federal Reserve

A central bank; oversees and regulates the banking system and controls the monetary base.

LIBOR

London interbank offered rate is Europe’s equivalent to the federal funds rate.

Federal Funds Rate

The rate that banks are charged when they borrow from the Fed.

Open-Market Operations

The Fed chooses government bonds to buy and sell daily because they can be stored indefinitely and are easy to buy and sell on the open market.

Reconstruction Finance Corporation (RFC)

Established in 1932 and given the authority to make loans to banks in order to stabilize the banking sector.

Glass-Steagall Act

Created federal deposit insurance and increased the ability of banks to borrow from the Federal Reserve system.

Commercial banks

Depository banks that accepted deposits and were covered by deposit insurance.

Investment banks

Banks which engaged in creating and trading financial assets (stocks and corporate bonds) but were not covered by deposit insurance because their activities were considered riskier.

Leverage

Financing an investment with borrowed funds.

Balance sheet effect

The reduction in a firm’s net worth due to falling asset prices.

Vicious circle of deleveraging

Asset sales to cover losses forcing creditors to call in their loans, forcing sales of more assets, causing further declines in asset prices.

Subprime Lending

Lending to home buyers who don’t meet the usual criteria for being able to make the payments.

Securitization

A pool of loans assembled and shares of it sold to investors.