Ch 15 – Money & the Financial System
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BA 162 2025 spring
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35 Terms
What are the three main functions of money?
Medium of Exchange, Measure of Value, Store of Value
What is a medium of exchange?
Money used to buy/sell goods/services, replacing bartering
How does money act as a measure of value?
It provides a common standard for comparing goods and services
What does it mean for money to be a store of value?
It can be saved for future use and maintains value over time
What are the six characteristics of effective money?
Acceptability, Divisibility, Portability, Durability, Stability, Difficult to Counterfeit
Why is acceptability important for money?
It must be accepted by all parties for transactions to occur
What does divisibility mean for money?
It can be broken into smaller units for smaller transactions
What is meant by portability in money?
It can be easily transported and exchanged
Why is durability important for money?
It must physically withstand wear and tear over time
What does stability mean in terms of money?
It should retain value over time without major fluctuations
What makes money difficult to counterfeit?
Security features and technology make it hard to replicate
What were Rai stones?
Large limestone stones used as currency on the island of Yap
How did Rai stones function as money?
They served as a store of value and were exchanged via oral ownership history
What form of modern money is similar to Rai stones?
Bitcoin (due to decentralization and trust-based value)
What is fiat money?
Government-issued currency not backed by a physical commodity like gold
What gives fiat money its value?
Trust in the issuing government
What does GDP stand for?
Gross Domestic Product
What does GDP measure?
The total value of all goods and services produced in a country in a year
What does a rising GDP indicate?
Economic growth and a healthy economy
Who controls fiscal policy?
Congress and the President
What does fiscal policy involve?
Government spending and taxation
Who controls monetary policy?
The Federal Reserve (The Fed)
What does monetary policy influence?
Money supply and interest rates
What are the three tools of monetary policy?
Open market operations, discount rates, reserve requirements
What happens when the Fed buys government securities?
Increases money supply and stimulates the economy
What happens when the Fed sells government securities?
Decreases money supply and slows economic activity
What is the discount rate?
The interest rate the Fed charges banks to borrow money
What happens when the Fed raises the discount rate?
Increases interest rates, decreases money supply
What happens when the Fed lowers the discount rate?
Decreases interest rates, increases money supply
What is the reserve requirement?
The % of deposits banks must hold rather than lend out
What happens when the Fed increases reserve requirements?
Banks lend less, decreasing money supply
What happens when the Fed decreases reserve requirements?
Banks lend more, increasing money supply
What is inflation?
A rise in general prices that reduces the purchasing power of money
What is the Fed's target inflation rate?
About 2%
What causes inflation to rise?
High demand, limited supply, labor shortages, and corporate profit-taking (greedflation)