Business Essentials Chapter 16: Understanding Money and the Role of Banking

This set covers vocabulary related to the U.S. financial system, including types of money, financial institutions, the Federal Reserve, and electronic banking technologies.

Money

An object that is portable, divisible, durable, and stable, and that serves as a medium of exchange, a store of value, and a measure of worth.

Medium of Exchange

One of the three functions of money, serving as a tool to facilitate the trade of goods and services.

Store of Value

One of the functions of money, representing its ability to be held and used for future purchases.

Measure of Worth

A function of money that allows for the common measurement of the value of goods and services.

M-1

A measure of the money supply that includes only the most liquid (spendable) forms of money.

Currency (Cash)

Government-issued paper money and metal coins.

Check

A demand deposit order instructing a bank to pay a given sum to a specified payee.

Checking Account (Demand Deposit)

Bank account funds, owned by the depositor, that may be withdrawn at any time by check or cash.

M-2

A measure of the money supply that includes all components of M-1 plus forms of money that can be easily converted into spendable forms.

Time Deposit

Bank funds that have a fixed term of time to maturity and cannot be withdrawn earlier or transferred by check.

Money Market Mutual Fund

A fund of short-term, low-risk financial securities purchased with the pooled assets of investor-owners.

Commercial Bank

A company that accepts deposits that it uses to make loans, earn profits, pay interest to depositors, and pay dividends to owners.

Savings and Loan Association (S&L)

A financial institution accepting deposits and making loans primarily for home mortgages.

Mutual Savings Bank

A financial institution whose depositors are owners sharing in its profits.

Credit Union

A nonprofit, cooperative financial institution owned and run by its members, usually employees of a particular organization.

Pension Fund

A nondeposit pool of funds managed to provide retirement income for its members.

Insurance Company

A nondeposit institution that invests funds collected as premiums charged for insurance coverage.

Finance Company

A nondeposit institution that specializes in making loans to businesses and consumers.

Securities Investment Dealer (Broker)

A financial institution that buys and sells stocks and bonds both for investors and for its own accounts.

Individual Retirement Account (IRA)

A tax-deferred pension fund that wage earners set up to supplement retirement funds.

Trust Services

Management by a bank of an estate, investments, or other assets on behalf of an individual.

Letter of Credit

A bank promise, issued for a buyer, to pay a designated firm a certain amount of money if specified conditions are met.

Banker’s Acceptance

A bank promise, issued for a buyer, to pay a designated firm a specified amount at a future date.

Electronic Funds Transfer (EFT)

Communication of fund-transfer information over wire, cable, or microwave.

Automated Teller Machine (ATM)

An electronic machine that allows bank customers to conduct account-related activities $24$ hours a day, $7$ days a week.

Federal Deposit Insurance Corporation (FDIC)

A federal agency that guarantees the safety of deposits up to $250,000$ in the financial institutions that it insures.

Federal Reserve System (The Fed)

The central bank of the United States, which acts as the government’s bank, serves member commercial banks, and controls the nation’s money supply.

Monetary Policy

The management of the nation’s economic growth by managing the money supply and interest rates.

Reserve Requirement

The percentage of its deposits that a bank must hold in cash or on deposit with the Fed.

Discount Rate

The interest rate at which member banks can borrow money from the Fed.

Federal Funds Rate (Key Rate)

The interest rate at which commercial banks lend reserves to each other, usually overnight.

Open-Market Operations

The Fed’s sale and purchase of securities in the open market.

Automated Clearing House (ACH) Network

An electronic funds transfer system that provides interbank clearing of electronic payments for the nation’s financial institutions.

Check 21

The Check Clearing for the 21st Century Act, which allows receiving banks to make an electronic image of a paper check for instant payment.

Blink Credit Card

A card using a computer chip that sends radio-frequency signals in place of embedded magnetic strips.

Debit Card

A plastic card that allows an individual to transfer money between accounts.

Point-of-Sale (POS) Terminal

An electronic device programmed with electronic money that transfers funds from the customer’s bank account to pay for retail purchases.

Smart Card

A credit-card-sized plastic card with an embedded computer chip that can be programmed with electronic money.

Exchange Rate

The value of one currency compared to the value of another.

World Bank

A UN agency that provides limited financial services, such as funding improvements in underdeveloped countries.

International Monetary Fund (IMF)

A UN agency of about $150$ nations that combine resources to promote stable exchange rates and provide temporary short-term loans.