macro 4.1-4.3

money

anything decepted as payment for goods/services

barter system

goods,and services traded directly

inneficient as some goods cannot be split, and you must find someone who wants what you have, and has what you want

types of money- commodity

something that performs the function of money, and has intrinsic value

gold, silver

type of money-flat money

something that serves as money, but has no value or other uses

paper money

coins

function of money 3

medium exchange

money is used to buy goods/services without the barter system

unit of account

money is used to measure the value of goods/services

store of value

money allows people to store purchasing power for the future

purchasing power

amount of goods/services a unit of money can buy

why do coins have ridges

process is called reeding

prevents ppl from shaving metal off of coins

measuring the money supply

M0(physical currency)

includes all coins, and paper bills in circulation

M1(narrow money)

M0 plus

checkable bank deposits

saving deposits

M2(near money) everything in M1 plus

time deposts, cds

money market funds

inflation

reduces the power of money over time

nominal interest rate, and formula

the stated/advertised interest rate, does not adjust for inflation

real interest rate+expected inflation

real interest rate

the interest rate adjusted for inflation

nominal-expected inflation

shows ur purchasing power changes when you lend/borrow

financial sector

network of institutions that link borrowers/lenders

banks

pension funds

mutual funds

assets

anything tangible, or intangible that has value

interest rate

amount lender charges borrowers for borrowing money

interest-bearing assets

assets that earn interest rate over time

bonds

personal finance

refers to how individuals/families budget, save, spend

credit cards, stock market, loans, etc

interest rates. and investment

both have an inverse relationship

ex if interest rates decrease, investment increaaes

liquidity

ease with which an asset can be converted to a medium of exchange

higher liquidity- lower rate of return

lower liquidity-higher rate of return

bonds

loans, or iuos, that rep debt that gov, business, or individual must repay to the lender

bondholders- have no ownership in the company, are paid interest

can be bought/sold before they mature

if interest rates decrease, bond prices increase, inverse relationshop

bond is issued at spefici interest, and does not change

stocks

ownership of coporation, and the stockholder is often entitled to a portion of the provide paid out as dividends

fractional reserve banking

system in which commercial banks keep only a portion of deposits, and lend out the remaining funds

reserved requiremnt (reserve ratio

percentage of deposits that banks are required to keep on hand, and not loan out

demand deposits

money deposited in commercial bank

required reserves

percent banks must hold by law

excess reserves

amount of money a bank can loan out

transaction demand for money

money held for everyday purchases

asset demand for money

money held bc its less risky than other assets

monetary policy

when central bank changes the money supply to influence interest rates

reserve requirement

percentage of customer deposits that banks must legally hold

discount rate

interest rates the federal reserve charges commercial banks for borrowing money directly from the fed

open market operations

when central bank buys, or sells gov bonds to change the money supply, and interest rates

expansionary monetary policy

used to increase the money supply, lower interest rates, abd decrease spending

contractionary monetary policy

decrease money supply, increase interest rates,, decrease spending

fed funds rate

interest banks charge one another for another loans of reserves

interest on reserves

interest rate the fed bank pays banks to hold reserves, banks will not lend money at rates lower thab what they can earn from the fed

discount rate as a cap

if ffr rises above discount rate, banks will borrow from the fed instead