Key Economic Terms and Definitions

asset

resource with economic value that an individual, a company, or a country owns or controls with the expectation that it will provide future value.

bond

an interest bearing asset that represents a loan to a company or government.

bank

a financial intermediary that provide liquid assets in the form Of bank deposits to lenders and uses those funds to finance borrowers investment spending on illiquid assets.

central bank

a government institution that issues currency, oversees and regulates the banking system, controls the monetary base, and implement monetary policy.

ample-reserve

describes an economy in which banks hold high levels Of excess reserves and therefore changes in the supply Of reserves does not change the interest rate significantly.

bank deposit

a claim on a bank that obliges the bank to give the depositor their cash.

bank reserves

the currency that banks hold in their vaults plus their deposits at the central bank.

commodity money

a good used as a medium of exchange that has intrinsic value in Other uses.

commodity-backed (representative) money

a medium of exchange with no intrinsic value, but whose ultimate value is guaranteed by a promise that it can be converted into valuable goods.

currency debasement

expansion Of the supply Of currency so rapid that the currency loses much Of its value.

demand deposits or checkable deposits

deposits where depositors have the right to go into a bank and demand their entire checking account balance at any time.

discount rate

the interest rate that the central bank charges on loans to banks.

excess reserves

a bank's reserves over and above it's required reserves.

federal funds rate

(in the United States) the interest rate that banks charge Other banks for overnight loans, as determined in the federal funds market.

federal funds market

a financial market that allows banks that fall short Of reserve requirements to borrow reserves from banks that are holding excess reserves.

Federal Reserve Bank

the central bank for the United States.

fiat money

a medium of exchange whose value derives entirely from its official status as a means Of payment, having no intrinsic value. Sometimes called token money.

financial asset

a nonphysical asset that entitles the buyer to future income from the seller.

financial risk

uncertainty about future outcomes that involve financial losses or gains.

fractional reserve banking system

a banking system in which only a fraction Of bank deposits are backed by cash on hand and available for withdrawal.

illiquid

describes an asset if it cannot be quickly converted into cash without much loss of value.

implementation regime

how a central bank implements monetary policy.

interest on reserve balances (IORB)

the amount the central bank pays in interest to banks for their balances held in reserves.

liability

a requirement to pay money in the future.

limited-reserves

describes an economy in which reserves are scarce and therefore relatively small changes in the supply of reserves shifts the money supply curve and changes the interest rate.

liquid

describes an asset if it can be quickly converted into cash without much loss of value.

loan

a lending agreement between an individual lender and an individual borrower.

loanable funds market

a hypothetical market that brings together those who want to lend money and those who want to borrow money.

MO or MB

the Monetary Base. The total amount Of currency, which is coins and dollar bills, that is in circulation or kept on reserve by commercial banks.

Ml

Transactions Money. Money that can easily be used for transactions should be counted as money.

M2

Broad Money. M2 starts with Ml and adds several Other kinds Of assets, Often referred to as near-moneys, financial assets that aren't directly usable as a medium of exchange but can readily be converted into cash or checkable bank deposits.

medium of exchange

an asset that is usable for buying and selling goods and services.

money

any asset that can easily be used to purchase goods and services.

money demand curve

shows the relationship between the quantity Of money demanded and the interest rate.

money market

refers to the demand for and supply of money, examining the relationship between quantity Of money and interest rates.

money supply

the total value of financial assets in an economy that are considered money.

mutual fund

a financial intermediary that creates a stock portfolio by buying and holding shares in companies and then selling shares Of the stock portfolio to individual investors.

nominal interest rate

the interest rate that is actually paid for a loan, unadjusted for the effects Of inflation.

open-market operations

a purchase or sale of government debt (U.S. Treasury bills) by a central bank (Federal Reserve).

overnight interbank lending rate

the interest rate that banks charge other banks for overnight loans. This rate is sometimes referred to as the central bank's policy rate.

physical asset

a tangible Object that the owner has the right to use or dispose Of the object as they wish.