Economics for Today - Chapter 15: Money Creation

Flashcards covering key vocabulary and concepts related to money creation and monetary policy.

Goldsmiths

The founders of modern-day banking.

Fractional Reserve Banking

A system in which banks keep only a percentage of their deposits on reserve as vault cash and deposits at the Fed.

Liabilities

The amounts the bank owes to others; found on the right side of the balance sheet.

Assets

The amounts the bank owns; found on the left side of the balance sheet.

Required Reserves

The minimum balance that the Fed requires a bank to hold in vault cash or on deposit with the Fed.

Required Reserve Ratio

The percentage of deposits that the Fed requires a bank to hold in vault cash or on deposit with the Fed.

Excess Reserves

Potential loan balances held in vault cash or on deposit with the Fed in excess of required reserves.

Money Multiplier

The maximum change in the money supply (checkable deposits) due to an initial change in the excess reserves banks hold.

Monetary Policy

The Federal Reserve’s use of open market operations, changes in the discount rate, and changes in the required reserve ratio to change the money supply (M1).

Open Market Operations

The buying and selling of government securities by the Federal Reserve System.

Discount Rate

The interest rate the Fed charges on loans of reserves to banks.

Federal Funds Market

A private market in which banks lend reserves to each other for less than 24 hours.

Federal Funds Rate

The interest rate banks charge for overnight loans of reserves to other banks.