Chapter 13: Money and Banks

These flashcards cover key concepts and definitions related to money, banks, and the money supply based on the lecture notes.

What is money?

Money is an essential medium of exchange that facilitates market transactions and can be characterized as a medium of exchange, a store of value, and a standard of value.

What are the components of M1?

M1 includes cash in circulation and transactions account balances.

What are the key principles of money creation by banks?

Banks create transactions account balances by making loans, and transactions account balances are the largest part of the money supply.

What is the money multiplier?

The money multiplier is the ratio that indicates how much the money supply can increase as a result of deposit creation from excess reserves.

What is the difference between required reserves and excess reserves?

Required reserves are the minimum amount a bank must hold, while excess reserves are any amount above the required reserves that a bank can lend out.

What role do banks play in the circular flow of income and spending?

Banks transfer money from savers to spenders by lending funds from deposits, facilitating economic activity.

How does a bank's reserve ratio affect its ability to create money?

A bank's reserve ratio determines the amount of excess reserves available for lending; a lower reserve ratio increases the potential for money creation.

What are the four major constraints on lending activity in banks?

The major constraints are bank deposits, willing borrowers, willing lenders, and government regulation.

What is the significance of cashless payment methods like debit cards and online services?

While they enable transactions, debit cards and online services are not considered money as they don’t serve as a store of value or a standard of value.

What is a potential issue with cryptocurrencies like Bitcoin as currency?

Bitcoins are highly volatile and do not reliably serve as a store of value or standard of value, leading to concerns about their usability in transactions.