Macro Chapter 16

Commodity Money

Money that takes the form of a commodity that has intrinsic value like gold or silver

Fiat Money

Money backed by the government

Medium of Exchange

Money is traded to receive goods and services

Unit of Account

Money is standardly used to record debt and post prices

Store of Value

Money can be used at a future period, it doesn’t go “bad”

Money Supply

Quantity of money available in the economy

Currency

Paper bills and coins in the hands of the non-bank public

Demand deposits

Balances in bank accounts that depositors can access on demand by writing checks

M1

Currency, demand deposits, traveler’s check, and other checkable deposits

M2

M1 + savings deposits, small denomination time deposits, money market mutual funds, and a few minor categories

Central Bank

The bank of commercial banks, an institution that oversees the banking system and regulates money supply

Monetary Policy

Setting of the money suply by policy makers in the central bank

Federal Open Market Committee (FOMC)

The organization that decides monetary policy; consists of board of governors and presidents of some regional Fed Banks

Fractional Banking System

When banks keep fraction of deposits as reserved and use the rest to make loans

Reserve Requirements

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

Reserve Ratio

100 x [Reserves / Deposits]

Money Multiplier

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

1/R

Bank Assets

Reserves, loans, securities

Bank Liabilities

Deposits, debt, equity

Bank Capital

Balancing figure, resources a bank obtains by issuing equity to its owners

Leverage / Debt

The use of borrowed funds to supplement existing funds for investment purposes

Leverage Ratio

The ratio of assets to bank capital

If bank assets fall under the ratio, bank capital becomes negative and bank becomes insolvent

Capital Requirement

Government regulation specifying a minimum amount of capital to ensure banks can pay off depositors and debt

Open Market Operations (OMOs)

Purchase and sale of government bonds by the Fed

Discount Rate Adjustments

Adjusting the interest rate on loans the Fed gives out to banks

Bank Runs

Withdrawal of funds by depositors from the bank

Federal Funds Rate

Overnight lending rate between banks