Money, Banks, and the Federal Reserve System

Flashcards covering key vocabulary and definitions related to money, banking, and the Federal Reserve System, as discussed in the lecture notes.

Money

Any asset that people are generally willing to accept in exchange for goods and services, or for payment of debts.

Asset

Anything of value owned by a person or a firm.

Barter

Trading goods and services directly for other goods and services without using money.

Double Coincidence of Wants

A situation in which two people each have something the other wants, necessary for barter to work.

Commodity Money

Goods used as money that also have value independent of their use as money.

Medium of Exchange

Money is acceptable to a wide variety of parties as a form of payment for goods and services.

Unit of Account

Money allows a way of measuring value in a standard manner.

Store of Value

Money allows people to defer consumption till a later date by storing value.

Good Characteristics for Medium of Exchange

Acceptable to most, standardized quality, durable, valuable relative to weight, divisible.

Fiat Money

Money, such as paper currency, that is authorized by a central bank or governmental body and does not have to be exchanged for gold or some other commodity money.

M1

The narrowest definition of the money supply: the sum of currency in circulation, checking account deposits in banks, and holdings of traveler’s checks.

M2

A broader definition of the money supply: it includes M1, plus savings account balances, small-denomination time deposits, balances in money market deposit accounts, and non-institutional money market fund shares.

Reserves

Deposits that a bank keeps as cash in its vault or on deposit with the Federal Reserve.

Required Reserves

Reserves that a bank is legally required to hold, based on its checking account deposits.

Required Reserve Ratio (RR)

The minimum fraction of deposits banks are required by law to keep as reserves.

Excess Reserves

Reserves over the legal requirement that banks may choose to hold.

Simple Deposit Multiplier

The ratio of the amount of deposits created by banks to the amount of new reserves.

Fractional Reserve Banking System

A banking system in which banks keep less than 100 percent of deposits as reserves.

Bank Run

A situation in which depositors lose confidence in a bank and try to withdraw their money all at once.

Bank Panic

A situation in which many banks simultaneously experience bank runs.

Lender of Last Resort

A central bank's role in promising to make loans to banks in order to pay off depositors and prevent bank runs and panics.

Discount Loans

Loans made by the Federal Reserve to banks.

Discount Rate

The interest rate paid on money banks borrow from the Fed.

Federal Deposit Insurance Corporation (FDIC)

Insures deposits in many banks, up to a limit; helps to limit bank panics.

Federal Open Market Committee (FOMC)

The committee that conducts America’s monetary policy.

Open Market Operations

The buying and selling of Treasury securities by the Federal Reserve in order to control the money supply.

Quantity Theory of Money

A theory about the connection between money and prices that assumes that the velocity of money is constant.

Velocity of Money

The average number of times each dollar in the money supply is used to purchase goods and services included in GDP.

Hyperinflation

Very high rates of inflation—in excess of 100 percent per year.