Chapter 10 terms (money, prices, and the federal reserve)

ECON 2010

Money

is any asset that can be used in making purchases

• coins, currency, checking, account balances, traveler checks.

• shares of stock are not money

Money has three principle functions:

1. medium of exchange

2. unit of account

3. store of value

money makes barter unnecessary

Barter

is trading goods directly

• trading bread for a cow instead of paying with money

M1

a “narrow” definition

= Currency in circulation + demand deposits + other checkable deposits

• money thats right there ready to use in transactions.

M2

a “broad” definition of money

M2= M1 + savings deposits + small denomination time deposits + money market mutual funds.

Bank reserves

are cash or similar assets held by banks

• used to meet depositors withdrawals and payments

Cash

cash in a banks vault is not part of the money supply

• unavailable for payments

Bank deposits

available for use in transactions ARE part of the money supply

• can be used in transactions

reserve to deposit ratio

is bank reserves divided by total deposits

fractional reserve banking system

holds fewer bank reserves than deposits