Economics - Money, Banks, and the Federal Reserve System

Flashcards covering key vocabulary from a lecture on money, banks, and the Federal Reserve System.

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.

Double Coincidence of Wants

A situation in which two people each have a good or service that the other wants; required for barter trades.

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; it is liquid, easily exchanged for goods.

Standard of Deferred Payment

Money facilitates exchanges across time when we anticipate that its value (purchasing power) in the future will be predictable.

Fiat Money

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

M1

The narrow definition of the money supply: the sum of currency in circulation and checking account deposits in banks.

M2

A broader definition of the money supply that includes M1, plus small-denomination time deposits, savings account deposits, and noninstitutional 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 that banks hold over the legal requirement.

T-account

A stripped-down version of a bank balance sheet, showing only how a transaction changes a bank’s balance sheet.

Simple Deposit Multiplier

The ratio of the amount of deposits created by banks to the amount of new reserves; calculated as 1/RR.

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 many depositors simultaneously lose confidence in a bank and try to withdraw their money.

Bank Panic

A situation in which many banks experience bank runs at the same time.

Discount Loans

Loans made by the Fed to banks.

Discount Rate

The rate of interest the Fed charges on discount loans.

Federal Deposit Insurance Corporation (FDIC)

A federal agency established in 1934 that insures deposits in many banks, up to a limit.

Federal Open Market Committee (FOMC)

The committee responsible for open market operations and managing the money supply in the United States.

Monetary Policy

The actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic objectives.

Open Market Operations

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

Securitization

The process of transforming loans or other financial assets into securities.

Shadow Banking System

Non-bank financial firms that raise funds from investors and provide them directly or indirectly to firms and households.

Velocity of Money

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

Quantity Theory of Money

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

Hyperinflation

Very high rates of inflation—in excess of 50 percent per month.