Macroeconomics - Test 4 Study Guide

Medium of exchange

any item sellers generally accept and buyers generally use to pay for a good or service

unit of account

a standard unit in which prices can be stated and the value of goods and services can be compared

store of value

an asset set aside for future use; one of the three functions of money

liquidity

the degree to which an asset can be converted quickly into cash with little or no loss of purchasing power. Money is said to be perfectly liquid, whereas other assets have lesser degrees of liquidity.

M1

narrow defined money supply. The currency in the hands of the public, checkable deposits, and savings deposits held at commercial banks and thrifts

M2

more broad defined money supply, equal to M1 plus small time deposits and individual money market mutual fund balances

What backs the money supply?

Nothing, it is fiat money. It is maintained by the government's credibility, acceptability, legal tender

What are the functions of the Federal Reserve?

issues currency, sets reserve requirements, lends money to banks, collect checks, acts as the government's fiscal agent, supervises banks, controls the money supply