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ECON 104: FINAL CHAPTER 13
A "money"
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An asset that people are generally willing to accept in exchange for gods and services or for payments of debts
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Asset
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Anything of value owned by a person or firm
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Four functions of money
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1) Medium of exchange
2) Unit of account
3) Store of value
4) Standard of deferred payment
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Medium of exchange
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Most important
Money serves as a medium of exchange when sellers are willing to accept it in exchange for goods or services.
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Unit of account
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USA = $1
In a barter system, each god has many prices
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Store of Value
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Money allows value to be stored easily. If you do not use all your dollars to buy goods and services today, you can hold the rest to use in the future
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Standard of deferred payment
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Money is useful because it can serve as a standard of deferred payment in borrowing and lending
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Commodity Money
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A good used as money that also has value independent of its use as money (deerskin, weapons, etc.)
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Why is a barter system inefficient
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1) Requires a double coincidence of wants
2) Has a very high search costs
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Fiat money (Faith money)
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Money such as paper currency, that is authorized by a central bank or government body and that does not have to be exchanged by the central bank for gold or some other commodity money
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Five criteria that make an asset suitable to use as a medium of exchange
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1) Acceptable
2) Standardized quality
3) Durable
4) Valuable relative to its weight
5) Divisible
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M1 Money Supply
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Narrowest definition of the money supply
1) Cash currency in circulation (not held by banks or gov)
2) Checking account deposits in bank
3) Holdings on travelers checks
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M2 Money Supply
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1) All of M1
2) Saving account deposits
3) "Small" time deposits like certificates of deposit
4) Money market accounts
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Reserves
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Deposits that a bank keep as cash in its vault or on deposits with the Federal Reserve
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Required reserves (RES)
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Reserves that a bank is legally required to hold, based on its checking account deposits
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Required reserve ratio (RES/DEP)
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The minimum fraction of deposits banks are required by law to keep as reserves
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Excess Reserves (ER)
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Reserves that banks hold over and above the legal requirement (usually loans these out)
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Total Reserves
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Required reserves + Excess Reserves
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Simple money multiplier
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The ratio of the amount of deposits created by banks to the amount of new reserves
1/RR
Change in checking account deposits = change in bank reserves x (1/RR)
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RR of .1 (10%). Round 1 John deposits X000. Round 2 Abby deposits max. Round 3 loan?
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XXXX
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Discount Window loans
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Loans the Federal Reserve makes to banks
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Discount Window rate
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The interest rate the federal reserve charges on discount loans
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Bank Run
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A situation in which many depositors simultaneously decide to withdraw money from a bank
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Bank Panic
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A situation in which many banks experience runs at the same time
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Security |
A financial as - such as a stock or a bond - that can be bought and sold in a financial market
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Securitization
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The process of transforming loans or other financial assets into securities
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