Quiz 2 Notes - Chapter 4

Money

The stock of assets that can be readily used to make transactions.

Medium of exchange

Function of money that allows it to be used to buy goods and services.

Store of value

Function of money that transfers purchasing power from the present to the future.

Unit of account

Common unit of measurement for prices and value.

Fiat money

Currency that has no intrinsic value, such as paper money.

Commodity money

Money that has intrinsic value, such as gold or silver coins.

Monetary policy

Control over the money supply.

Federal Reserve

The central bank of the United States.

Open-market operations

The purchase and sale of government bonds by the Federal Reserve to control the money supply.

Discount rate

Interest rate at which commercial banks borrow from the Federal Reserve.

Reserve requirement

The percentage of deposits that banks must keep in vault or on deposit with the Federal Reserve.

100-percent-reserve banking

Banking system where banks hold all deposits as reserves.

Fractional reserve banking

Banking system where banks hold a fraction of their deposits as reserves.

Bank capital

Resources a bank's owners have put into the bank; difference between values of assets and liabilities.

Leverage

Use of borrowed money to supplement existing funds for investment purposes.

Capital requirement

Minimum amount of capital that banks must maintain as mandated by regulators.

Money multiplier

Ratio that measures how much the money supply increases with a change in the monetary base.

Quantitative easing

A monetary policy where the Fed buys long-term government bonds to reduce long-term interest rates.

Federal Deposit Insurance (FDIC)

A government agency that provides insurance to depositors in banks to prevent bank runs.

Money Supply

M = C + D = (C + D)/B