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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