03 14 2013 The exchange of one good or service for another Double Coincidence of Wants The unlikely occurrence that two people each have a good or service that the Vocab Barter other wants Money services Unit of Account Store of Value to the future Liquidity of exchange Commodity Money Intrinsic Value Gold Standard Fiat Money decree Currency The set of assets in an economy that people regularly use to buy goods and services from other people Medium of Exchange An item that buyers give to sellers when they want to purchase goods and The yardstick people use to post prices and record debts An item that people can use to transfer purchasing power from the present The ease with which an asset can be converted into the economy s medium Money that takes the form of a commodity with intrinsic value Item would have value even if it were not used as money Gold When an economy uses gold as money or uses paper money that is convertible into gold on demand Money without intrinsic value that is used as money because of government The paper bills and coins in the hands of the public Balances in bank accounts that depositors can access on demand by writing Demand Deposits a check Federal Reserve Fed The central bank of the United States Central Bank quantity of money in the economy Lender of Last Resort An institution designed to oversee the banking system and regulate the A lender to those who cannot borrow from anywhere else Money Supply The quantity of money available in the economy Monetary Policy The setting of the money supply by policymakers in the central bank Open Market Operation The purchase and sale of U S government bonds Reserves Deposits that banks have received but have not loaned out A banking system in which banks hold only a fraction of deposits as reserves Accounting Statement AKA Balance Sheet Fractional Reserve Banking Reserve Ratio Reserve Requirement Excess Reserves The fraction of deposits that the bank holds as reserves Fed sets a minimum amount of reserves that banks must hold Banks may hold reserves above the legal minimum The amount of money the banking system generates with each dollar of The resources that a bank s owners have put into the institution The use of borrowed money to supplement existing funds for purposes of Money Multiplier reserves Bank Capital Leverage investment Leverage Ratio Credit Crunch phenomenon sometimes Open Market Operations Discount Rate Reserve Requirements against deposits Federal Funds Rate Notes The ratio of assets to bank capital Capital Requirement A government regulation specifying a minimum amount of bank capital The shortage of Capital induced the banks to reduce their lending a The purchase and sale of U S government bonds by the Fed The interest rate on the loans that the Fed makes to banks Regulations on the minimum amount of reserves that banks must hold The interest rate at which banks make overnight loans to one another Money has 3 functions in the economy Medium of Exchange Unit of Account Store of Value unit of account When we want to measure and record economic value we use money as the A person can also transfer purchasing power from the present to the future by holding nonmonetary assets such as stocks and bonds The term WEALTH is used to refer to the total of all stores of value including both money and nonmonetary assets MONEY is the most LIQUID asset When price RISES the value of money FALLS Money stock for the U S economy includes not just currency but also deposits in banks and other financial institutions that can be readily accessed and used to buy goods and services The FED has 2 related jobs Regulate Banks to Ensure the Health of the Banking System More Important Job To control the quantity of money that is made available in the economy Money Supply Federal Open Market Committee FOMC SUPPLY OF MONEY Money Supply Currency Demand Deposits IF BANKS HOLD ALL DEPOSITS IN RESERVE BANKS DO NOT INFLUENCE THE When Banks hold only a fraction of deposits in reserve banks create money Money Multiplier is the reciprocal of the Reserve Ratio The amount of money banks create depends on the reserve ratio The higher the reserve ratio the less of each deposit banks loan out and the smaller the money multiplier Reserve Loans and Securities on the left side of the balance sheet must equal in total the deposits debt and capital on the right side of the sheet When any individual buys or sells a bond money changes hands but the amount of money in circulation remains the same The higher the interest rate on reserves the more reserves banks will choose to hold Federal Deposit Insurance Corporation FDIC The discount rate is the interest rate banks pay to borrow directly from the Federal Reserve through the discount window The discount rate and the federal funds rate move closely together
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