Money and Monetary Policy Flashcards

Vocabulary flashcards based on lecture notes about money, monetary policy, and the Federal Reserve.

Monetary Policy

Government actions to influence the money supply and credit conditions to stimulate or restrain economic activity.

Barter System

A system of exchange in which goods or services are directly traded for other goods or services without using money.

Money

Anything that is generally accepted as payment for goods and services or repayment of debts.

Wealth

The total collection of assets that store value.

Income

A flow of earnings per unit of time.

Commodity Money

Something that performs the function of money and has alternative uses (e.g., gold, silver).

Fiat Money

Something that serves as money but has no other important uses (e.g., paper money).

Medium of Exchange

Function of money that allows it to be used to buy goods and services, avoiding the complications of barter.

Unit of Account

Function of money that allows it to measure and compare the value of all goods and services.

Store of Value

Function of money that allows it to retain purchasing power for future use; it doesn’t spoil or die.

Liquidity

Ease with which an asset can be converted into cash.

M1

A measure of the money supply including coins, currency, and checkable deposits; high liquidity.

M2

A measure of the money supply including M1 plus savings deposits, time deposits, and money market mutual funds below $100K; medium liquidity.

Credit Card

A short-term loan, not money.

Personal Finance

The way individuals and families budget, save, and spend.

Assets

Anything of monetary value owned by a person or business.

Bonds

Loans, or IOUs, that represent debt that the government or a corporation must repay to an investor.

Stocks

Shares of ownership in a corporation.

Dividends

Portions of a corporation’s profits paid out to stockholders.

Capital Gain

The profit earned when a stockholder sells stock for more than the purchase price.

Capital Loss

Occurs when a stockholder sells stock at a lower price than the purchase price.

Purchasing Power

The amount of goods and services a unit of money can buy.

Inflation

A general increase in prices and fall in the purchasing value of money.

Demand for Money

Shows an inverse relationship between nominal interest rates and the quantity of money demanded.

Money Supply

The total amount of money in circulation in a country.

Federal Reserve System (FED)

The central bank of the United States responsible for setting monetary policy.

Reserve Requirement (Ratio)

The percentage of deposits that banks must hold in reserve and cannot loan out.

Money Multiplier

1 / Reserve Requirement (ratio)

Discount Rate

The interest rate that the FED charges commercial banks for loans.

Open Market Operations

When the FED buys or sells government bonds (securities).

Federal Funds Rate

The interest rate that banks charge one another for one-day loans of reserves.

Real Interest Rate

The percentage increase in purchasing power that a borrower pays, adjusted for inflation.

Nominal Interest Rate

The percentage increase in money that a borrower pays, not adjusted for inflation.

Fisher Effect

Nominal Interest Rate = Real Interest Rate + Expected Inflation

Loanable Funds Market

The private sector supply and demand of loans; shows the effect on REAL interest rates.

Crowding Out

A decrease in private investment and consumption that occurs when government increases borrowing.

Paradox of Thrift

When one individual increases her savings, she destroys income for someone else in the economy.

Giffen Good

A good for which demand increases as the price increases, and falls when the price decreases.

Veblen Good

Goods that contradict the basic law of demand because of their snob appeal.

Leakage

A situation in which capital, or income, exits an economy, or system, rather than remains within it.