Mankiw 29 - Monetary System

money

The set of assets in an economy that people regularly use to buy goods and services.

medium of exchange

An item that buyers give to sellers when they purchase goods and services.

unit of account

The yardstick people use to post prices and record debts.

store of value

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

liquidity

The ease with which an asset can be converted into the economy’s medium of exchange.

commodity money

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

fiat money

Money without intrinsic value that is used as money because of government decree.

currency

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

demand deposits

Balances in bank accounts that depositors can access on demand by writing a check.

Federal Reserve (Fed)

The central bank of the United States.

central bank

An institution designed to oversee the banking system and regulate the quantity of money in the economy.

money supply

The quantity of money available in the economy.

monetary policy

The setting of the money supply by policymakers in the central bank.

reserves

Deposits that banks have received but have not loaned out.

fractional-reserve banking

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

reserve ratio

The fraction of deposits that banks hold as reserves.

money multiplier

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

bank capital

The resources a bank’s owners have put into the institution.

leverage

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

leverage ratio

The ratio of the bank’s total assets to bank capital.

capital requirement

A government regulation specifying a minimum amount of bank capital.

open-market operations

The purchase and sale of U.S. government bonds by the Fed.

discount rate

The interest rate on the loans that the Fed makes to banks.

reserve requirements

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

federal funds rate

The interest rate at which banks make overnight loans to one another.

_____ is the primary function of money by which it is accepted as a means of payment.

Medium of exchange

Money serves as a _____ when it is used to measure the value of goods and services.

Unit of account

A _____ is an item that retains value over time, allowing individuals to save for future consumption.

Store of value

_____ refers to how easily an asset can be converted into cash.

Liquidity

_____ is a type of money that has intrinsic value, like gold or silver.

Commodity money

The value of _____ money is established by government decree, not by physical commodities.

Fiat

_____ deposits are funds held in bank accounts that can be withdrawn upon request by check.

Demand

The _____ is responsible for setting monetary policy in the United States.

Federal Reserve (Fed)

_____ refer to the amount of money that banks are required to hold in reserves.

Reserve requirements

The _____ rate influences how much banks pay for their loans from the Fed and ultimately affects other interest rates.

Discount

What is the definition of money?

Money is the set of assets in an economy that people regularly use to buy goods and services.

What does 'medium of exchange' mean?

An item that buyers give to sellers when they purchase goods and services.

What is a 'unit of account'?

The yardstick people use to post prices and record debts.

Define 'store of value'.

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

What does 'liquidity' refer to?

The ease with which an asset can be converted into the economy’s medium of exchange.

What is 'commodity money'?

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

Define 'fiat money'.

Money without intrinsic value that is used as money because of government decree.

What is currency?

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

What are 'demand deposits'?

Balances in bank accounts that depositors can access on demand by writing a check.

What is the Federal Reserve (Fed)?

The central bank of the United States.

What is a central bank?

An institution designed to oversee the banking system and regulate the quantity of money in the economy.

What does 'money supply' refer to?

The quantity of money available in the economy.

Define 'monetary policy'.

The setting of the money supply by policymakers in the central bank.

What are 'reserves'?

Deposits that banks have received but have not loaned out.

What is 'fractional-reserve banking'?

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

What is the 'reserve ratio'?

The fraction of deposits that banks hold as reserves.

Define 'money multiplier'.

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

What is 'bank capital'?

The resources a bank’s owners have put into the institution.

What does 'leverage' mean in banking?

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

What is the 'leverage ratio'?

The ratio of the bank’s total assets to bank capital.

Define 'capital requirement'.

A government regulation specifying a minimum amount of bank capital.

What are 'open-market operations'?

The purchase and sale of U.S. government bonds by the Fed.

What is the 'discount rate'?

The interest rate on the loans that the Fed makes to banks.

Define 'reserve requirements'.

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

What is the 'federal funds rate'?

The interest rate at which banks make overnight loans to one another.

What is the primary function of money?

To be accepted as a means of payment – medium of exchange.

How does money serve as a 'unit of account'?

It measures the value of goods and services.

What is a 'store of value'?

An item that retains its value over time for future consumption.

Define 'liquidity'.

The ease of converting an asset into cash.

What is 'commodity money'?

Money with intrinsic value, like gold or silver.

What establishes the value of fiat money?

Government decree, not by any physical commodity.

What are demand deposits?

Funds that can be withdrawn at any time by writing a check.

Who sets monetary policy in the United States?

The Federal Reserve (Fed).

What are reserve requirements?

The minimum amount of reserves banks are required to hold.

How does the discount rate affect banks?

It influences how much banks pay for loans from the Fed.

What is 'inflation'?

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

What is 'deflation'?

The decrease in the general price level of goods and services.

What are interest rates?

The cost of borrowing money, usually expressed as a percentage.

Define 'capital'.

Assets owned by a business or individual that can be used to generate income.

What is 'monetary expansion'?

The increase of the money supply in an economy by the central bank.

What does 'tight monetary policy' mean?

A policy used by central banks to decrease the money supply and raise interest rates.

What is a 'bank run'?

When a large number of customers withdraw their deposits simultaneously.

Define 'quantitative easing'.

A monetary policy where a central bank buys securities to increase the money supply.

What are 'government bonds'?

Debt securities issued by a government to support government spending.

What is 'currency devaluation'?

A reduction in the value of a currency in relation to other currencies.

What is the 'balance of payments'?

A record of all economic transactions between residents of a country and the rest of the world.

What are 'foreign exchange reserves'?

Deposits of foreign currency held by a central bank.

What does 'financial stability' imply?

A condition where the financial system operates efficiently and is resilient to shocks.