Unit 4: The Financial Sector

Money

anything generally accepted in exchange for goods and services

Commodity Money

something that performs the function of money and has intrinsic value

Fiat Money

something that serves as money but has no other values or uses

Medium of Exchange

whatever is widely accepted as a method of payment

Unit of Account

a means for comparing the values of goods and services

Store of Value

money allows you to store purchasing power for the future

Purchasing Power

the real goods and services that money can buy; determines the value of money

Liquidity

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

M0

cash

M1

currency, demand deposits, traveler's checks, and other checkable deposits

M2

M1 plus savings accounts, certificates of deposit, and other liquid assets

Assets

anything tangible or intangible that has value

Interest-bearing Assets

assets that earn interest over time (i.e. bonds)

Bonds

loans or IOUs that the government, business, or individual must repay to the lender

Stocks

represents ownership in a company

Real Interest Rates

interest rates adjusted for inflation

Nominal Interest Rates

interest rates that are not adjusted for inflation, or changes in purchasing power

Fractional Reserve Banking

a banking system that keeps only a fraction of funds on hand and lends out the remainder

Demand Deposits

balances in bank accounts that depositors can access on demand by writing a check or withdrawing from an ATM

Required Reserves

reserves that a bank is legally required to hold and cannot lend out, used as a tool in a limited reserve system

Excess Reserves

reserves that banks hold over and above the legal requirement; portion of reserves that can be loaned out

Balance Sheet

statement of assets and liabilities for a bank or other institution - must be equal to each other

Transaction Demand for Money

people hold money for everyday transactions

Asset Demand for Money

people hold money since it is less risky than other assets

Federal Reserve Bank

the central bank of the United States; responsible for implementing monetary policy

Discount Rate

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

Federal Funds Rate

the interest rate at which banks make overnight loans to one another, the fed influences this rate through open market operations.

Open Market Operations

used in limited reserve systems, the buying and selling of government securities to alter the supply of money

interest on reserves (IOR)

used in an ample reserve system, the rate at which the Federal Reserve Banks pay interest on reserve balances, used to encourage or discourage banks from keeping their money with the Fed

administered rate

interest rates set by the fed rather than determined by the market in an ample reserve system

Limited Reserve System

banks hold their reserves, do not deposit many reserves with the central bank. the three tools of monetary policy (reserve requirements, discount rate, and open market operations) are used to influence interest rates

Ample Reserve System

a system where banks deposit their reserves with the fed instead of keeping them, the fed sets interest rates by changing the interest on reserves