Banks, Money, and the Federal Reserve System

A collection of vocabulary flashcards covering key concepts and definitions from Chapter 14: Banks, Money, and the Federal Reserve System.

What is Money?

A medium of exchange that facilitates trade in goods and services.

Barter System

A method of trading goods and services directly for other goods and services without using money.

Double Coincidence of Wants

The situation required in a barter system where two parties each want what the other has to offer.

Commodity Money

Goods used as money that have value independent of their use as money.

Medium of Exchange

One of the primary functions of money, facilitating transactions.

Store of Value

The function of money that allows it to hold value over time.

Unit of Account

A function of money that provides a standard measure of value in the economy.

Standard of Deferred Payments

A function of money that makes it possible to settle debts.

Characteristics of Money

Acceptability, standardized quality, durability, transportability, and divisibility.

Fiat Money

Currency that a government has declared to be legal tender but is not backed by a physical commodity.

M1 Money Supply

The measure of money supply that includes currency in circulation and checking account deposits.

M2 Money Supply

A broader measure of the money supply that includes M1 plus small-denomination time deposits and noninstitutional money market fund shares.

Debit Cards

Cards that allow direct access to checking accounts, but are not money themselves.

Credit Cards

Plastic cards that provide short-term loans but do not represent money directly until paid off.

Federal Reserve

The central bank of the United States responsible for regulating the money supply and supervising banks.

Reserves

Deposits that a bank keeps as cash in its vault or on deposit with the Federal Reserve.

Fractional Reserve System

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

Bank Run

A situation where a large number of depositors withdraw their money simultaneously due to fears of insolvency.

Bank Panic

Occurs when multiple banks experience simultaneous bank runs.

Lender of Last Resort

The role of central banks to provide emergency funds to solvent banks that cannot obtain funds elsewhere.

Discount Loans

Loans made by the Federal Reserve to banks at an interest rate known as the discount rate.

Board of Governors

The governing body of the Federal Reserve System responsible for overseeing the Federal Reserve.

Federal Open Market Committee (FOMC)

A Federal Reserve committee responsible for open market operations and managing the money supply.

Federal Deposit Insurance Corporation (FDIC)

A government agency that insures deposits in many banks and helps to maintain public confidence in the banking system.

Open Market Operations

The buying and selling of Treasury securities by the Federal Reserve to control the money supply.

Securitization

The process of transforming loans or financial assets into marketable securities.

Shadow Banking System

Financial firms that provide credit but do not operate as traditional banks and are less regulated.

Investment Banks

Financial institutions that do not accept deposits but assist in creating and trading securities.

Money Market Mutual Funds

Funds that sell shares to investors and invest in short-term treasury bills and commercial paper.

Hedge Funds

Investment funds that raise capital from wealthy investors and engage in high-risk investments.

Moral Hazard

The risk that a party insulated from risk behaves differently than it would behave if it were fully exposed to the risk.

Interest on Reserve Balances (IORB)

The interest rate paid by the Federal Reserve on reserve balances held by banks.

Ample-Reserves Regime

A system where banks hold substantially more reserves than required by the central bank.

Scarce-Reserves Regime

A system where banks hold the minimum reserves required by the central bank.

Financial Crisis of 2007–2009

A global financial crisis marked by the collapse of the housing bubble and failures of major financial institutions.

Leverage

The use of borrowed money to increase the potential return of an investment.

Bankruptcy

A legal status of an individual or entity that cannot repay debts owed to creditors.