Overview of Money, Banking, and the Federal Reserve

These flashcards encompass key concepts related to money, banking system operations, and the Federal Reserve's role in managing the economy.

Functions of Money

Three primary roles: Medium of exchange, Unit of account, Store of value.

Medium of Exchange

An item that buyers give to sellers to purchase goods and services, simplifying trade.

Unit of Account

A measure that allows for easy comparison of values and recording of debts.

Store of Value

An item that can transfer purchasing power from the present to future.

Commodity Money

Money that takes the form of a commodity with intrinsic value, like gold.

Fiat Money

Money that has no intrinsic value or backing by a commodity; value derives from government decree.

Money Supply

The quantity of money circulating in the economy.

Currency

Physical paper bills and coins in the hands of the public.

Demand Deposits

Balances in bank accounts that depositors can access on demand.

M1

Includes the most liquid assets of the money stock such as demand deposits and currency.

M2

Includes M1 plus savings deposits, small time deposits, and money market mutual funds.

Fractional-Reserve Banking

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

Reserve Requirement

The minimum amount of reserves that banks must hold, set by the Federal Reserve.

Money Multiplier

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

Open-Market Operations

The buying and selling of government securities by the Federal Reserve to influence the money supply.

Discount Rate

The interest rate the Federal Reserve charges banks for short-term loans.

High Interest Rate on Reserves

Incentivizes banks to hold more reserves, decreasing the money supply.

Problems with Measuring Money Supply

Challenges include the USD's widespread use abroad and the rise of electronic payment methods.