Monetary System Study Notes

Fiat Money

Money without intrinsic value, used due to government decree (e.g., U.S. Dollar).

Central Bank

Oversees the banking system, regulates money supply, and ensures financial stability.

Reserve Requirement

Percentage of deposits banks must hold in reserve.

Open Market Operations

Buying/selling government securities to control money supply.

Discount Rate

Interest rate charged to banks for loans from the central bank.

Money Stock

Total quantity of money circulating in the economy.

Money Supply

Total amount of paper bills and coins in the public's hands.

Demand Deposits

Balances in bank accounts accessible on demand by writing a cheque.

Fractional Reserve Banking

Banks keep a fraction of deposits as reserves and lend out the rest.

Reserve Ratio

Fraction of deposits that banks hold as reserves.

Minimum Reserve Requirements

Minimum amount of reserves that banks must hold.

Interest Rates and Loan Demand

Higher interest rates reduce quantity demanded for loans.

Saving Incentives

Policies that increase saving supply and lower interest rates.

Investment Incentives

Policies that increase demand for loans.

Private Saving

Income households have left after paying taxes and consumption.

Public Saving

Tax revenue government has left after its spending.

Accounting Identity

S (saving) = I (investment). National savings finances investment.

Budget Surplus

Excess of tax revenue over government spending.

Budget Deficits

Shortfall of tax revenue from government spending.