Term
Money
-definition
-three functions |
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Definition
any commodity or token that is generally acceptable as a means of payment or of settling a debt
-means of payment: a method of settling a debt
Three functions
-Medium of exchange
-Unit of account
-Store of value |
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Term
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Definition
any object that is generally accepted in exchange for goods and services- people with something to sell will always accept as payment (ex money, credit)
-overcomes need for double coincidence of wants: people always want currency |
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Term
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Definition
| an agreed measure for stating the prices of goods and services (opportunity cost stated in dollar amount, not what you have to give up) |
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Term
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Definition
| can be held and exchanged later for goods and services- why it can serve as means of payment (other ex: house, car) |
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Term
| Two official measures of money |
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Definition
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Term
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Definition
Measure of money that consists of currency and traveler's checks plus checking deposits owned by individuals and business- all means of payment
Does not include:
-currency held by banks
-currency and checking deposits owned by the US governemnt |
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Term
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Definition
| Measure of money that consists of M1 plus time, saving deposits, money market mutual funds, and other deposits (M2 includes M1) |
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Term
| Difference between M1 & M2 |
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Definition
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Term
Depository institution
-three types
-four benefits provided |
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Definition
a financial firm that takes deposits from households and firms.
-deposits are components of M1&M2
Three types: commercial banks, thrift institutions, money market mutual funds
Benefits:
-creating liquidity
-lowering the cost of borrowing
-lowering the cost of monitoring borrowers
-pooling risk |
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Term
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Definition
| firm that is licensed to receive deposits and make loans |
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Term
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Definition
| savings and loan associations, saving banks, and credit unions are thrift institutions |
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Term
| Money Market Mutual Funds |
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Definition
fund operated by a financial institution that sells shares in the fund and holds assets such as US Treasury bills and short-term commercial bills
-its shares act like bank deposits |
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Term
Federal Reserve System (Fed)
-central bank
-monetary policy |
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Definition
the central bank of the United States
-central bank: a bank's bank and a public authority that regulates a nation's depository institutions and conducts monetary policy
-monetary policy: it adjusts the quantity of money in circulation and influences interest rates |
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Term
| The structure of the Fed (three key elements) |
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Definition
-The Board of Governors
-The regional Federal Reserve banks
-The Federal Open Market Committee |
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Term
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Definition
-Seven member board appointed by the President of the US and confirmed by the Senate that governs the Fed
-members have 14 year (staggered) terms- one seat becomes vacant every two years
-Pres appoints one board member as chairman every four years, currently Ben Bernanke |
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Term
| The regional Federal Reserve banks |
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Definition
-nation divided into 12 Federal Reserve districts
-each provides check-clearing services to commercial banks and issues bank notes
-Bank of New York- implements the Fed's policy decisions in the financial markets |
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Term
| The Federal Open Market Committee (FOMC) |
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Definition
-the main policy making organ of the Federal Reserve System
Voting members:
-chairman, other six members of the Board of Governors
-The presidents of the Federal Reserve Bank of NY
-The presidents of the other regional Federal Reserve banks (rotating basis- only four vote)
-Meets approx. every six weeks to review the state of the economy and to decide the actions to be carried out by the New York Fed |
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Term
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Definition
-US government securities
-Loans to depository institutions |
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Term
| Fed's two main liabilities |
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Definition
-Federal Reserve Notes
-Depository institution deposits |
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Term
How Fed influence on the quantity of money and interest rates
-three tools it uses |
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Definition
adjusts the quantity of reserves available to the banks and the reserves the banks must hold
How it does this:
1)conducting open market operations: purchase or sale of security by Fed in Loanable funds market
2) Making last resort loans: bank is short of reserves, borrow from fed
3)setting required reserve ratio: minimum percentage of deposits that depository institutions are required to hold as reserves |
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Term
| Monetary base and Fed buying and selling of securities |
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Definition
-When Fed buys securities in an open market operation: monetary base increases
-When Fed sells securities: decreases |
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Term
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Definition
Increase in monetary base (by Federal Reserve- excess reserves- bank lends excess reserves (creates new deposits)- quantity of money increases- new deposits are used to make payments- money that remains on deposit, some currency drain- excess reserves desired reserves increase
-when they call back a loan: destroys money |
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Term
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Definition
| the ratio of the change in the quantity of money to the change in monetary base |
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Term
| When the fed buys securities from a ban |
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Definition
| the bank's reserves increase but its deposits do not change |
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Term
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Definition
| the proposition that in the long run, an increase in the quantity of money brings an equal percentage increase in the price level |
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Term
| For a commercial bank the term reserves refers to |
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Definition
| the cash in its vaults and its deposits at Federal Reserve |
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