10 The Monetary System Flashcards
Define money
The stock of assets that can be readily used to make transactions. Liquid assets.
What are the functions of money?
- As a store of value
- As a unit of account
- As a medium of exchange
What do we mean by store of value?
Money as a way of transferring purchasing power from the present to the future.
What do we mean by unit of account?
Money as providing the terms in which prices are quoted and debts are recorded.
What do we mean by medium of exchange?
Money as what we use to buy goods and services.
What are the types of money and their definitions?
Fiat money - no intrinsic value, established as money by government decree or fiat (it is the most common).
Commodity money - with intrinsic value, established as money as it has real world value (e.g the gold standard).
Define financial intermediation
The process of transferring funds from savers to borrowers.
Define reserves
The deposits that banks have received but have not lent out.
What does 100-percent-reserve banking assume?
That all deposits are held as reserves.
What is fractional-reserve banking?
A system under which banks keep only a fraction of their deposits in reserve.
Define bank capital
Resources that the bank owns itself to get the business going.
What are the three ways banks use resources?
- Held as reserves
- To make bank loans
- To buy financial securities
Define leverage
The use of borrowed money to supplement existing funds for the purposes of investment.
What is the leverage ratio?
The ratio between the bank’s total assets to the bank capital.
Define capital requirements
Restrictions that banking or financial regulators place to ensure banks hold sufficient capital. To ensure that banks will be able to pay their depositors.
