Chapter 20 - Money, price & financial intermediaries

The banking system and the allocation of saving to productive uses

• Financial intermediaries: firms that extend credit to borrowers using funds raised from savers.

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• Money: any asset that can be used in making purchases.

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• Medium of exchange: asset used in purchasing goods and services.

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• Barter: direct trade of goods or services for other goods/services.

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• Unit of account: basic measure of economic value.

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• Store of value: asset that serves as a means of holding wealth.

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• M1: sum of currency outstanding and balances held in checking accounts.

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• M2: all the assets in M1 plus some additional assets that are usable in making payments but at greater cost or inconvenience than currency or checks.

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Commercial banks and the creating of money

• Bank reserves: cash or similar assets held by commercial banks for the purpose of meeting depositor withdrawals and payments.

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• 100% reserve banking: situation in which banks' reserves equal 100% of their deposits.

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• Reserve-deposit ratio: bank reserves divided by deposits.

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• Fractional-reserve banking system: banking system in which bank reserves are less than deposits so that the reserve-deposit ratio is less than 100%.

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Central banks, the money supply and the prices

• Federal Reserve System (or the Fed): central bank of the United States.

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• Monetary policy: determination of the nation's money supply.

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• Open-market purchase: purchase of government bonds from the public by the Fed for the purpose of increasing the supply of bank reserves and the money supply.

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• Open-market sale: sale by the Fed of government bonds to the public for the purpose of reducing bank reserves and the money supply.

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• Open-market operations: open-market purchases and open-market sales.

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• Velocity: measure of the speed at which money changes hands in transactions involving final goods and services, or, equivalently, nominal GDP divided by the stock of money.

  

• Quantity equation: money times velocity equals nominal GDP.

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