4 Monetary System Flashcards
Functions of money
Medium of exchange
Unit of account
Store of value
Commodity money
Satisfies the 3 functions of money and also has an intrinsic value (e.g gold)
Fiat money
Satisfies the 3 functions of money but has no intrinsic value. It is used because of government decree
What is a potential problem with fiat money
If people lose faith in it then it’ll lose its value
Money stock
Sum of all fiat money which is government approved (legal tender)
M1
Currency + demand deposits +checkable deposits
M2
M1+ savings deposits (short term) + money market mutual funds
What does the central bank do?
Oversees the banking system
Regulates the quantity of money in the economy
What is the goal of the monetary policy committee?
2% CPI inflation rate
What is the MPC?
Monetary Policy Committee, they work at the Bank of England and are independent from the government
Federal reserve main goal
To ensure the health of the nation’s banking system
What is the ECB’s main goal?
To achieve price stability, inflation below but close to 2% in the medium term
Reserves
Deposits that banks have received but have not loaned out
Reserve ratio
Fraction of deposits that banks hold as reserves
Reserve requirement
The minimum amount of reserves that banks must hold. Exists in US and EU but not UK
Excess reserve
Any reserves held above the legal minimum