Week 9 - Money, Banking and Monetary Policies

Commodity money

a medium of exchange that has other values (ex: gold or silver coins)

Commodity backed money

money that has no intrinsic value, but can be exchanged for a valuable good (gold standard)

Fiat money

A medium of exchange whose value derives from a government decree (paper money today)

Liquid asset

can be quickly converted into cash without much loss of value 

Illiquid asset

can’t be exchanged for cash easily

Bank Functions

1. Take liquid assets and make them illiquid 

2. Hold cash reserves

3. Create money (money multiplier)

Cash Reserves

The portion of a bank's deposits that it must keep on hand & not lend out

Money Multiplier

"create" money by lending out more than they hold in reserves, which increases the total money circulating in the economy

Deposit insurance

a guarantee by the federal government that depositors’ savings are insured 

Capital requirement

banks must keep a certain amount of extra assets (like bonds) that are separate from the money they owe to their customers (the deposits).

Reserve requirement

banks must keep a certain percentage of their deposits in reserve (usually 10%)

Monetary policy

a central bank’s actions and communications aimed at managing the money supply and interest rates to influence the economy (ex: The Federal Reserve)

The Federal Reserve

a central bank that oversees and regulates the banking system and controls the monetary base 

Central bank

a national bank that provides financial and banking services for its country’s government and commercial banking system, as well as implementing the government’s monetary policy and issuing currency 

Open market operations 

The purchase or sale of government debt by the Federal reserve 

Primary Dealer

a firm that buys government securities directly from a government, with the intention of reselling them to others, thus acting as a market maker of government securities

Indirect bidder

An entity that purchases Treasury securities at auction through an intermediary, such as a dealer or bank