Econ ch. 17

Currency

Coins and bills

Money

Any generally accepted means of payment.

Medium of exchange

What people trade for goods and services.

If you want to buy groceries, you offer money in exchange for them; if you work, you accept money as payment for your labor.

Barter

Occurs when there is no commonly accepted medium of exchange.

It involves individuals trading some good or services they already have for something else they want.

Double coincidence of wants

In which each party in an exchange transaction happens to have what the other party desires.

Commodity money

Involves the use of an actual good for money.

In this situation, the good itself has value apart from its function as money.

Commodity-backed money

Money you can exchange for a commodity at a fixed rate.

For example, until 1971, U.S. dollars were fixed in value to specific quantities of silver and gold. A $1 U.S. silver certificate looks much like dollar bills in circulation today, but the print along the bottom of the note reads, "one dollar in silver payable to the bearer on demand."

Fiat money

Money with no value expect as the medium of exchange; there is no inherent or intrinsic value to the currency.

Unit of account

The measure in which prices are quoted.

Store of value

Means for holding wealth.

Checkable deposits

Deposits in bank accounts from which depositors may make withdrawals by writing checks.

M1

The money supply measure composed of currency and checkable deposits. Also includes traveler's checks.

M2

Includes everything in M1 plus savings deposits. Also includes money market mutual funds and small-denomination time deposits (certificates of deposit, or CDs).

Money supply (M)

currency + deposits

Balance sheet

An accounting statement that summarizes a firm's key financial information.

Assets

Items a firm owns.

Liabilities

Financial obligations the firm owes to others.

Owner's equity

The difference between the firm's assets and its liabilities.

Reserves

The portion of bank deposits set aside and not loaned out.

Includes both currency in the bank's vault and funds that the bank holds in deposit at its own bank, the federal reserve.

Fractional reserve banking

Occurs when banks hold only a fraction of deposits on reserve.

Occurs when many depositors attempt to withdraw their funds from a bank at the same time.

Required reserve ratio (rr)

The portion of deposits that banks required to keep on reserve.

Required reserves =

rr x deposits

Excess reserves =

total reserves - required reserves

Moral hazard

Lack of incentive to guard against risk where one is protected from its consequences.

Simple money multiplier (m)

The rate at which banks multiply money when all currency is deposited into banks and they hold no excess reserves.

Equation 1/rr

Federal funds

Deposits that private banks hold on reserve at the Fed.

Federal funds rate

The interest rate that banks charge each other on interbank loans.

Discount loans

The loans from the Fed to the private banks are known as

Discount rate

The interest rate on the discount loans made from the Fed to private banks.

Open market operations

Involve the purchase or sale of bonds by a central bank.

When the Fed wants to increase the money supply, it buys securities; in contrast, when it wishes to decrease the money supply, it sells securities.

Quantitative easing

The central bank buys longer-term treasury securities and other types of securities, specifically targeting certain markets.

Discount window

The banks obtain these loans at the Fed's___ The rate the private banks pay on these loans is known as the discount rate.