Chapter 13: Financial Sector

13.1 & 13.2 Financial Assets and Definition, Measurement, and Functions of Money

• Money: something commonly accepted as payment for goods and service

  • Mediums of exchange
  • Store value
  • Unit of account

• Currency: item used as money but does not act as a store of value and has no intrinsic value

• Commodity money: raw material with intrinsic value used as exchange for other goods

• Wealth: value of total assets owned by individual or entity

13.3 Banking and Expansion of the Money Supply

• Money supply: amount of money available on the market
• Liquidity: refers to how easily money can be accessed

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• Fractional reserve banking system: only a portion of total deposits are held while the rest are lent out
  • Reserve ratio = bank reserves divided by total deposits
• Money creation: generation of assets caused by initial deposit to bank which is held partially in reserve, partially constantly redistributed as a loan
• Money multiplier: total amount of deposits resulting from initial deposit that is held as reserve
  • Reciprocal of required reserve ratio
• Discount rate: interest rate banks pay to borrow money from the Fed
• Open market operations: involve Fed’s purchase and sale of government securities
• Financial assets: entities over which institutional units or individuals assert ownership rights
  • Subcategory of economic assets

13.4 Monetary Policy

• Monetary policy: use of money and credit controls to influence interest rates, inflation, exchange rate, unemployment, real GDP

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