Money and Monetary Policy Practice Flashcards

A set of 30 vocabulary flashcards covering the core concepts of money functions, banking, the Federal Reserve, and monetary policy based on the provided lecture transcript.

Medium of Exchange

What sellers generally accept and buyers generally use to pay for goods and services.

Store of Value

An asset that can be used to transport purchasing power from one time period to another.

Unit of Account

A standard unit that provides a consistent way of quoting prices.

Commodity Monies

Items used as money that also have intrinsic value in some other use, such as precious metals or agricultural commodities.

Fiat Money

Items designated as money that are intrinsically worthless, also known as token money.

Legal Tender

Money that a government has required to be accepted in settlement of debts.

Currency Debasement

The decrease in the value of money that occurs when its supply is increased rapidly.

M1 Money

Transactions money that can be directly used for transactions, including currency in circulation, demand deposits, and savings deposits.

M2 Money

Broad money that includes everything in M1 plus money market accounts, CDs, and other near monies.

Near Monies

Close substitutes for transactions money.

Principal

The amount borrowed in a loan.

Nominal Interest Rate

The interest rate specified in a loan contract.

Maturity Date

The length of time before a bond holder is paid back, ranging from 1 month to 30 years.

Face Value

The amount paid out to a bond holder when the maturity date is reached.

Coupon

A fixed amount paid (typically semi-annually or annually) to a bond holder, similar to an interest payment.

Treasury Securities

Bonds issued by the U.S. Federal Government, sometimes called t-bills or government bonds.

Mortgage-Backed Securities (MBS)

An asset where banks package together a group of mortgages and sell it to financial institutions or individuals.

Federal Reserve

The central bank in the United States, founded in 1913, which acts as an independent agency.

Federal Open Market Committee (FOMC)

A group composed of the 7 members of the Fed board and rotating district bank presidents that sets goals for money supply and interest rates.

Lender of Last Resort

The Fed's role in providing funds to troubled banks that cannot find any other sources of funds.

Financial Intermediation

The process of transferring funds from savers to borrowers.

Reserves

The money banks hold onto, typically deposited in their account at the Federal Reserve Bank plus cash in the vault.

Required Reserve Ratio

The percentage of deposits that banks are required by regulation to hold on reserve.

Excess Reserves

Any reserves held by a bank in excess of the required number of reserves.

Money Multiplier

The multiple by which deposits can increase for every dollar increase in reserves, equal to $\frac{1}{rr}$.

Open Market Operation

The purchase and sale of treasury bonds (securities) from or to banks by the Federal Reserve.

Federal Funds Rate

The interest rate one bank charges another bank for an overnight loan of reserves.

Discount Rate

The interest rate a bank pays to borrow reserves directly from the Federal Reserve Bank.

Dual Mandate

The 1977 requirement for the Fed to maintain stable prices and maximize employment.

Taylor Rule

The formula or guideline used by the Fed to determine the Federal Funds Rate target given the state of output and prices.