Econ Unit 4 Vocabulary - Financial Institutions and Interest Rates

Fiat Money

official money used by the government

3 Functions money must serve

Medium of Exchange, Strive of Value, and Unit of Account (Standard of Value)

Medium of Exchange

facilitates transactions between individuals, businesses, financial institutions, and governments in the economy

Store of Value

when people hold money as savings for purchases sometime in the future (savings)

Unit of Account

tool of comparison that allows us to compare prices and determine whether we have enough in our account to make a particular purchase

Federal Reserve System

central bank for the United States

Federal Reserve’s Unique Qualities

it is both a private and public institutio

Private 

District Banks 

Public

Board of Governors

Chairman of the Fed

Jerome Powell

Federal Open Market Committee (FOMC)

monetary policy making body of the Federal Reserve System 

3 Jobs of the Fed

Payment Processing, Banking Supervision, and Monetary Policy

Payment Processing

the Fed maintains accounts for commercial banks and the Federal government, process checks, and electronically transfer funds. Distributes and receives currency and coin, and keeps currency in good condition and in circulation

Banking Supervision

the Fed writes regulations that govern the operations and business of banks and other financial institutions

Monetary Policy

how the Fed influences the economy to achieve maximum employment and price stability

Fed Dual Mandate

uses its tools to maintain Price Stability and Maximum Employment

Federal Funds Rate

the interest rate on overnight loans between banks and other entities that have reserve deposits in the Fed

FOMC Meeting

members vote to raise, lower, or maintain their target for an interest rate (FFR)

Open Market Operations

when the Fed buys or sells bonds

Two Phases of Monetary Policy

Expansionary and Contractionary

Expansionary

used during a recession, FOMC buys bonds, votes to lower FFR which lowers interest rates and increases the money supply

Contractionary

used during inflation, FOMC sells bonds, votes to raise FFR which raises interest rates, lowering the money supply