Unit 3 Review: Money and Banking Concepts

Barter

trading one item in exchange for another; exchanging goods/services without money

M1

most liquid forms of money; money that is easily accessible and easy to spend; i.e: cash, checks, debit/credit cards

M2

includes all M1 money types and less accessible types of money; i.e: savings accounts

CD

savings account for a limited amount of time; say I give the banks a $1000 for 6 months

Functions of Money

medium of exchange; standard measure of value; store of value, keeps its value, allowing people to save and spend it later

Demand Deposits

basic deposit into a savings account, + checkings accounts; bank account funds that can be withdrawn on demand without prior notice

Depository Institutions

banks, credit unions that accepts deposits from customers; basically a bank

Non-Depository Institutions

non-bank financial institutions; Insurance companies, retirement funds, that offer financial services, but don't accept deposits

Federal Reserve

the central bank of the us; issues the us currency (federal reserve notes); regulates monetary policy and supervises banks

Monetary Policy

actions taken by the fed to control the money supply and interest rate

Expansionary Policy

increases the money supply; lowers interest rates; stimulates spending and economic growth (inflation)

Contractionary Policy

decreases the money supply; raises interest rates; slows down inflation and economic activity (deflation)

Inflation

the slow increase of the prices of things; means the economy is growing, but means that the value of $1 decreases over time

Hyperinflation

inflation but on crack

Deflation

a decrease in prices; makes the value of $1 increases over time; causes the economy to stagnate/collapse since people know their $1 will be more valuable in the future, and therefore not spend their money

Stagflation

a combination of stagnant economic growth, high unemployment, and high inflation

Investments

giving someone/something your money with the expectation that it will generate income/profit; stock, bonds, investments

Assets

anything of value owned by someone; cash, property, investments

Liabilities

money that you owe people; debts, loans, mortgages

Scarcity

money must be limited to have value (supply and demand)

Durability

money should be long lasting and not easily destroyable

Portability

money must be easy to carry and move around

Divisibility

money must be divided into smaller amounts

Acceptability

money must be widely adopted to be accepted as a form of payment

Uniform

same units of money must all be the same (one $20 bill must look like another $20 bill)

central bank of the us

created to regulate the banking system and control the money supply

federal reserve notes

the official currency of the US

run on the bank

when a lot of people try to withdraw their deposits all at the same time, causing the bank to run out of cash

Banking Act of 1933 (Glass-Steagall Act)

commercial banking (taking deposits) is separate from investment banking (trading securities) and created the FDIC (federal deposit insurance corporation) to insure deposits and restore trust in banks

deregulation in the 1980s

it reduced regulation on banks, allowing them to take on more services and take on more risks

ronald reagan's administration

credited for deregulating the banks

inflation

a general increase in prices and fall in the purchasing value of money

deflation

a decrease in the general price level of goods and services

creeping inflation

1-3% annually - slow and gradual

walking inflation

3-10% annually - moderate

galloping inflation

over 10% annually - rapid

hyperinflation

50%+ MONTHLY - out of control

demand push inflation

excessive consumer demand drives prices up

cost push inflation

rising production costs increases prices

monetary inflation

excessive money supply growth devalues currency

FOMC

federal open market committee that sets monetary policy and oversees open market operations

Federal Reserve District Banks

12 regional banks that implement fed policies and supervise and provide financial services to member banks

member banks

private banks regulated by the fed that are required to hold reserves and follow fed rules

board of governors

7 members appointed by the president for 14 year terms that oversee the fed's operations

current chairman of the board of governors

jerome powell

past chairman

ben bernanke, janet yellen

major functions of the Federal Reserve

conducting monetary policy, regulating and supervising banks, maintaining financial stability, providing financial services

monetary policy

the fed's actions to influence the money supply and interest rates

open market operations (OMO)

buying and selling government securities (bonds)

discount rate

the interest rate the fed charges banks for short-term loans

reserve requirement

the percentage of deposits banks must hold in reserve