Money, the Federal Reserve, and the Interest Rate

These flashcards cover key vocabulary and concepts related to money, the Federal Reserve, and interest rates as outlined in the chapter.

Money

Anything generally accepted as a medium of exchange.

Functions of Money

Includes medium of exchange, store of value, and unit of account.

Medium of Exchange

Anything sellers generally accept and buyers use to pay for goods.

Barter System

The direct exchange of goods and services without using money.

Store of Value

An asset that can transport purchasing power over time.

Liquidity

The property of money that makes it easily exchanged for goods.

Unit of Account

A standard unit that provides a consistent way of quoting prices.

Commodity Money

Items used as money that also have intrinsic value.

Fiat Money

Items designated as money that are intrinsically worthless.

Legal Tender

Money required by law to be accepted in settlement of debts.

Currency Debasement

Decrease in the value of money due to rapid increase in its supply.

Verifiability at Low Cost

Ability to distinguish real money from counterfeit without high expense.

Required Reserve Ratio

Percentage of total deposits that a bank must keep as reserves.

Excess Reserves

The difference between a bank's actual reserves and required reserves.

Money Multiplier

The rate at which money supply increases for each dollar in reserves.

Federal Reserve Bank (the Fed)

The central bank of the United States.

Monetary Policy

Policy set to control the money supply and interest rates.

Federal Open Market Committee (FOMC)

Group that directs the operation of the Fed regarding monetary policy.

Open Market Operations

Buying and selling government securities by the Fed.

Lender of Last Resort

Institution providing funds to banks that cannot find other sources.

Nominal Income

Income measured in current dollars, not adjusted for inflation.

Bond

A debt instrument promising future payments at specific dates.

Interest Rate

The cost of borrowing money, expressed as a percentage.

Inverse Relationship between Interest Rates and Bond Prices

As bond prices rise, interest rates fall, and vice versa.

Transaction Motive

Need for money that facilitates transactions.

Demand for Money

The desire to hold money for transactions rather than other assets.

Opportunity Cost of Holding Money

Forgone interest from not holding interest-bearing assets.

Fractional Reserve Banking

System where banks hold a fraction of deposits as reserves.

Central Bank Functions

Control over money supply, clearing payments, and regulating banks.

Clearing Interbank Payments

Process of transferring funds between banks for transactions.

Types of Interest Rates

Includes U.S. Treasury Bill Rate, Federal Funds Rate, and Prime Rate.

AAA Corporate Rate

Interest rate on the highest-rated corporate bonds.

Commercial Paper Rate

Interest rate on short-term corporate borrowing.

Three-Month U.S. Treasury Bill Rate

Widely followed short-term interest rate.

Yield Curve

The relationship between interest rates of securities of different maturities.

M1

Transactions money including currency and checkable deposits.

M2

Broad money including M1 plus savings accounts and near monies.

Open Market Desk

Office in the Federal Reserve Bank where securities are bought/sold.

Discount Rate

Interest rate banks pay to borrow reserves from the Fed.

Sub-prime Mortgage

Loans made to borrowers who typically wouldn't qualify.

Securities of Different Maturities

Bonds and loans with varying repayment times.