Money & Monetary Policy Key Terms

Money

Any asset that can easily be used to purchase goods and services.

Currency in circulation

Cash held by the public.

Checkable bank deposits

Bank accounts on which people can write checks.

Money supply

The total value of financial assets in the economy that are considered money

Medium of exchange

An asset that individuals acquire for the purpose of trading rather than for their own consumption

Store Value

A means of holding purchasing power over time

Unit of account

A measure used to set prices and make economic calculations

Commodity money

A good used as a medium of exchange that has intrinsic value in other uses

Commodity-backed money

A medium of exchange with no intrinsic value whose ultimate value is guaranteed by a promise that it can be converted into valuable goods

Fiat money

A medium of exchange whose value derives entirely from its official status as a means of payment

Monetary aggregate

An overall measure of the money supply

Near-Money

Financial assets that can’t be directly used as a medium of exchange but can be readily converted into cash or checkable bank deposits

Bank reserves

The currency banks hold in their vaults plus their deposits at the Federal Reserve

T-account

A tool for analyzing a business’s financial position by showing, in a single table, the business’s assets (on the left) and liabilities (on the right)

Reserve Ratio

The fraction of bank deposits that a bank holds as reserves

Required ratio reserve

Smallest fraction of deposits that the Federal Reserve allows banks to hold

Bank run

A phenomenon in which many of a bank’s depositors try to withdraw their funds due to fears of a bank failure

Deposit insurance

Guarantees that a bank’s depositors will be paid even if the bank can’t come up with the funds, up to a maximum amount per account

Capital requirements

Regulators require that the owners of banks hold substantially more assets than the value of bank deposits

Reserve Requirements

Rules set by the Federal Reserve that determine the minimum reserve ratio for a bank. For example, in the United States, the minimum reserve ratio for checkable bank deposits is 10%

Discount window

An arrangement in which the Federal Reserve stands ready to lend money to banks in trouble

Excess reserves

Bank reserves over and above its required reserves

Monetary base

The sum of currency in circulation and bank reserves

Money multiplier

The ratio of the money supply to the monetary base

Central bank

An institution that oversees and regulates the banking system and controls the monetary base

Federal Reserve

A central bank—an institution that oversees and regulates the banking system, and controls the monetary base

Expansionary monetary policy

Monetary policy that increases aggregate demand

Contractionary monetary policy

Monetary policy that reduces aggregate demand

Inflation targeting

Occurs when the central bank sets an explicit target for the inflation rate and sets monetary policy in order to hit that target

Taylor rule for monetary policy

The target interest rate rises when there is inflation, or a positive output gap, or both

Monetary neutrality

Changes in the money supply have no real effect on the economy