Studied by 0 people
Looks like no one added any tags here yet for you.
Financial Assets
subcategory of financial assets; entities over which institutional units or indivudals assert ownership rights
Four Characteristics of Money
portability (must be easily transferred between individuals), durability (must endure and hold value through time), divisibility (money must be broken down into smaller units to make change), and fungibility (must carry interchangeable value between people across place and time)
Why are cigarettes not fungible?
people who don’t smoke wouldn’t see this as money as compared to someone in prison
Three Primary Functions of Money
medium of exhcnage, store of value, and unit of account
Medium of Exchange
money facilitates transactions by serving as an intermediary in the exchange of goods and services rather than bartering
Double Coincidence of Wants
the situation where two parties each hold an item the other wants, making a direct exchange possible
Store of Value
a function of money that means it is nonperishable and will hold up in the future
What distinguishes money from currency?
store value
Unit of Account
standard unit price for price listings and comparisons that provides a consistent measure of value for goods and services
Currency
used as money but does not act as a store of value or carry intrinsic value
All money is ______, but not all currency is ______
currency; money
Commodity Money
any raw material with intrinsic value that is used in exchange for other goods in an economy (refers to money like silver coins)
Fiat Money
refers to currency without intrinsic value (like paper cash)
Wealth
the value of the total assets owned by an individual or entity (assets - debts = wealth)
Central Banks
influence the value and supply of money by setting a policy rate
Policy Rate
the interest rate at which depository institutions lend reserve balances to each other overnight
Arbitrage
a strategy in which banks invest and borrow from each other to instantaneously maximize returns
Consumers are more likely to borrow and spend when interest rates are…
low
Consumers are less likely to borrow and spend when interest rates are…
high
Federal Reserve Bank
the central bank of the US (the Fed) since 1913
The Fed’s Dual Mandate
to maximize the employment rate and to maintain price stability
Price Stability
limits inflation and maintains value of the US dollar
Federal Funds Rate (FFR)
the US policy rate
Money Supply
the supply of currency and any other liquid assets in the US
Liquidity
how easily an asset can be transferred into currency
M1
the sum of coin and paper money plus checking deposits and savings deposits
M2
M1 plus small-time deposits, money market mutual funds, and Eurodollar deposits
Small-Time Deposits
deposits less than $100,000 with a fixed term of maturity
Eurodollar Deposits
overnight, dollar-denominated deposits in European banks
Limited Reserves
a situation in which banks have little excess reserves
Ample Reserves
a situation in which a bank has much excess reserves
The Fed uses which three tools to control money supply with limited reserves?
adjustments in the required reserve ratio, adjustments in the discount rate paid by banks to borrow from the Fed, and open market operations (buying and selling of government securities)
Required Reserve Ratio
the ratio of a bank’s reserves to its total deposits
Reserve Ratio Formula
Discount Rate
the interest rate banks pay to borrow money from the Fed
Open Market Operations
The Fed’s purchase and sale of government securities (bonds, bills, and notes)
Fractional Reserve Banking System
used in a limited reserves economy in which only a fraction of total deposits is held on reserve and the rest is lent out to borrowers, allowing for increased money supply and economic activity
Balance Sheet or T Account
financial statement that summarizes a company's assets, liabilities, and equity at a specific point in time
Assets Side of Balance Sheet
shows required reserves, excess reserves, and loans
Liabilities Side of Balance Sheet
shows deposits and reserves that can be borrowed from the Fed
Money Creation
the generation of assets caused when an initial deposit to a bank is held partially in reserve and partially redistributed as a loan (fractional reserve system)
Money Multiplier Formula
Money Multiplier
a formula that determines the maximum amount of money that can be created in the banking system for each dollar of reserves
The money multiplier was used in the US when there was…
limited reserves
When the Fed has ample reserves and doesn’t use a reserve ratio…
the money multiplier is obselete
The Fed’s response to the 2008 financial crisis included…
interest on reserves, adjustmetns to discount rate, and open market operations
Interest on Reserves
the Fed allows banks to earn interest on what ever they choose to hold in reserve
Administered Interest Rates
interest held on reserves and adjustments to the discount rate
Monetary Policy
the way in which the Fed uses its tools to influence interest rates, inflation, exchange rates, unemployment, and real GDP
Lower interest rates lead to…
increased quantity of money
Higher interest rates lead to…
decreased quantity of money
Lower interest rates lead to…
increased investment
Higher interest rates lead to…
decreased investment
A decrease in supply of reserves…
increases policy rate
An increase in supply of reserves…
decreases policy rate
When central banks increase and decreases administered interest rates…
they are increasing and decreasing demand for reserves
In order to limit crowding out from expansionary fiscal policy…
it can be combined with expansionary monetary policy to increase money supply and decrease interest rates
