Money and Banks

These flashcards cover key concepts related to money and banking, their roles in the economy, and the creation of money.

What is money?

Money is a tool that simplifies market transactions and acts as a medium of exchange.

What is barter?

Barter is the direct exchange of one good for another without the use of money.

What are the three purposes of money?

Medium of exchange, store of value, and standard of value.

What is M1 in the context of money supply?

M1 includes cash and transactions accounts such as checking accounts.

What is M2 in the context of money supply?

M2 includes M1 plus savings accounts and other account balances.

How do banks create money?

Banks create money by making loans using excess reserves.

What is the money multiplier?

The money multiplier is the amount of deposit dollars that the banking system can create from $1 of excess reserves.

What role do required reserves play in banking?

Required reserves are the minimum amount of reserves a bank must hold and not loan out.

What affects consumers’ ability to purchase goods and services?

The amount of money available, or the size of the money supply, affects purchasing ability.

What is the relationship between a bank's assets and liabilities?

A bank's assets must always equal its liabilities.

What constrains deposit creation in banks?

Factors like public preference for cash, banks' willingness to lend, and regulatory requirements constrain deposit creation.

What is the importance of excess reserves for banks?

Excess reserves allow banks to make additional loans and increase the money supply.

How does the Federal Reserve control the money supply?

The Federal Reserve controls the money supply by setting required reserve ratios.

What are the potential issues with bitcoins as money?

Bitcoins face problems such as value fluctuation and acceptability as payment.

What do banks do in the circular flow of the economy?

Banks transfer money from savers to spenders by lending funds held on deposit.

What impact does money creation have on aggregate demand?

Changes in the money supply may alter spending behavior and shift the aggregate demand curve.