Macro-Economics Chapter 29 & 30

central bank

an institution designed to oversee the banking system and regulate the quantity of money in the economy

commodity money

money that takes the form of a commodity with intrinsic value

currency

the paper bills and coins in the hands of the public

demand deposits

balances in bank accounts that depositors can access on demand by writing a check

discount rate

the interest rate on the loans that the Fed makes to banks

Federal Reserve

the central bank of the United States

flat money

money without intrinsic value that is used as money because of government decree

fractional-reserve banking

a banking system in which banks hold only a fraction of deposits as reserves

liquidity

the ease with which an asset can be converted into the economy's medium of exchange

medium of exchange

an item that buyers give to sellers when they want to purchase good and services

monetary policy

the setting of the money supply by policymakers in the central bank

money

the set of assets in an economy that people regularly use to buy goods and services from other people

money multiplier

the amount of money the banking system generates with each dollar of reserves

money supply

the quantity of money available in the economy

open-market operations

the purchase and sale of U.S. government bonds by the Fed

reserve ratio

the fraction of deposits that banks hold as reserves

reserve requirements

regulations on the minimum amount of reserves that banks must hold against deposits

reserves

deposits that banks have received but have not loaned out

store of value

an item that people can use to transfer purchasing power from the present to the future

unit of account

the yardstick people use to post prices and record debts

classical dichotomy

the theoretical separation of nominal and real variables

Fischer effect

the one-for-one adjustment of the nominal interest rate to the inflation rate

inflation tax

the revenue the government raises by creating money

menu costs

the costs of changing prices

monetary neutrality

the proposition that changes in the money supply do not affect real variables

nominal variables

variables measured in monetary units

quantity equation

the equation M x V = P x V, which relates the quantity of money, the velocity of money, and the dollar value of the economy's output of good and services

quantity equation theory of money

a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate

real variables

variables measured in physical units

shoeleather costs

the resources wasted when the inflation encourages people to reduce their money holdings

velocity of money

the rate at which money changes hands