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BU ECON 362 - Chapter 4 Definitions

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Chapter 4 Definition Sheet - Money: the stock of assets that can be readily used to make transactions - Medium of Exchange: we use it to buy stuff - Store of value: transfers purchasing power from the present to the future - Unit of account: the common unit by which everyone measures prices and values - Fiat Money: has no intrinsic value; ex: the paper currency we use - Commodity money: has intrinsic value; ex: gold coins, cigarettes in P.O.W camps - Money Supply: the quantity of money available in the economy - Monetary Policy: the control over the money supply - Central bank: where a country’s monetary policy is conducted - Federal Reserve (“the Fed”): The U.S.’ central bank - Open Market Operations: used by the Fed to control the money supply and is the purchase and sale of government bonds - M1: Currency plus demand deposits, travelers’ checks, other checkable deposits - M2: M1 + small time deposits, savings deposits, money market mutual funds, money market deposit accounts - Bank capital: the resources a bank’s owners have put into the bank - Leverage: the use of borrowed money to supplement existing funds for purposes of investment - Leverage Ratio: assets/capital - Capital: sometimes referred to as “residual value,” because in the case of bankruptcy, the law requires that debt holders be paid first - Capital Requirement: minimum amount of capital mandated by regulators; intended to ensure banks will be able to pay off depositors; higher for banksthat hold more risky assets - Reserves (R): the portion of deposits that banks have not lent - 100-percent-reserve banking: a system in which banks hold all deposits as reserves - Fractional-reserve banking: a system in which banks hold a fraction of their deposits as reserves - Monetary base: currencies + total bank reserves; B = C + R; controlled by the central bank- Reserve-deposit ratio: rr = R/D; depends on regulations and bank policies - Currency-deposit ratio: cr = C/D; depends on households’ preferences - Money multiplier: the increase in the money supply resulting from a one-dollar increase in the monetary base - Discount Rate: the interest rate the Fed charges on loans to banks - Reserve Requirements: Fed regulations that impose a minimum reserve-deposit ratio - Interest on Reserves: the Fed pays interest on bank reserves deposited with the Fed - Excess Reserves: reserves above the reserve requirement - Gold Standard: a monetary system in which gold serves as money or in which all money is convertible into gold at a fixed rate - Currency: the sum of outstanding paper money and coins - Demand Deposits: assets that are held in banks and can be used on demandto make transactions, such as checking accounts - Balance Sheet: an accounting statement that shows assets and liabilities- Financial Intermediation: the process by which resources are allocated fromthose individuals who wish to save some of their income for future consumption to those individuals and firms who wish to borrow to buy investment goods for future


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BU ECON 362 - Chapter 4 Definitions

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