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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