ECO211 CH 12

Money, Banking, and the Financial System

Money

Any good that is widely accepted for purposes of exchange and the repayment of debt

Medium of Exchange

Anything that is generally acceptable in exchange for goods and services

Unit of Account

A common measure in which relative values are expressed

Store of Value

The ability of an item to hold value over time

Barter

Exchanging goods and services for other goods and services without the use of money

Double coincidence of wants

A trader must find another trader who at the same time is willing to trade what the first trader wants and wants what the first trader has

Federal Reserve System

The central bank of the United States

M1

Currency held outside banks, plus demand deposits, plus other liquid deposits

Currency

Coins and paper money

Demand Deposits

Non-interest earning deposits that are “on demand” at any time without restrictions

Other liquid deposits

Other checkable deposits, savings deposits, money market deposit accounts

M2

M1, plus small denomination time deposits, plus money market mutual funds (retail)

Time Deposit

An interest earning deposit with a specified maturity date

Money Market Mutual Fund

An interest-earning account at a mutual fund companu, for which a minimum balance is usually required and most of which offer limited check-writing privelages

Warehouse Receipts

Documents issued by a warehouse that provide evidence of ownership of the goods stored, which can be used as collateral for loans or in sales.

Fractional Reserve Banking

A banking arrangement that allows banks to hold reserves equal to only a fraction of their deposit liabilities

Indirect Finance

A method of transferring money whereby funds are loaned a borrowed through a financial intermediary

Direct Finance

A method of transferring money whereby borrowers and lenders come together in a market setting, such as the bond market

Financial Intermediary

An institution that transfers funds from those who want to lend funds to those who want to borrow them

Asymmetric Information

A situation in which an economic agent on one side of a transaction has information that an economic agent on the other side of the transaction does not have

Adverse Selection

A phenomenon that occurs when parties on one side of the market who have information not known to others self-select in a way that adversely affects parties on the other side of the market

Moral Hazard

After the loan; A condition that exists when one party to a transaction changes his or her beahvior in a way that is hudden from, and costly to the other party

Balance Sheet

A record of the assets and lianilities of a bank

Asset

Anything of value that the bank owns or has claim to

Liability

Anything that is owed to someone else

Insolvency

A condition in which liabilities are greater than assets

Bank Capital

The difference between the assets and liabilites of a bank; a banks’ net worth