Ch 16 The Monetary System Flashcards
The exchange of one good or service for another
barter
the unlikely occurrence that two people each have a good or service that the other wants
double coincidence of wants
the set of assets in the economy that people regularly use to buy goods and services from each other
Money
what are the three functions of money
SUM
- Store of Value
- Unit of Account
- Medium of Exchange
used to refer to the total of all stores of value, including both money and nonmetary assets
wealth
to describe the ease with which an asset can be converted into the economy’s medium of exchange
liquidity
3 kinds of money
- Commodity money - has intrinsic value
- Fiat money - money without intrinsic value
- Fiduciary money
balances in bank accounts that depositors can access on demand simply by writing a check or swiping a debit card at a store
demand deposits
the two most widely followed measures of the money store are
M1 = currency, demand deposits, traveler's checks M2= M1 + small time deposits + money market mutual funds
What is the purpose of the central bank?
1) to oversee the banking system
2) to regulate the quantity of money in the economy
to control the quantity of money that is available is called
monetary policy
3 mechanisms of monetary policy
1) open market operations
2) key interest rate
3) reserve requirement
the purchase and sale of US government bonds
open market operations
banks create money in the economy through a process called
fractional reserve banking
the amount of money the banking system generates with each dollar of reserves is called the
money multiplier
formula for the money multiplier
1 / reserve ratio
the use of borrowed money to supplement existing funds for investment purposes
leverage
occurs when a large number of customers of a bank or financial institution withdraw their deposits simultaneously
bank run
the interest rate at which banks make overnight loans to each other
federal funds rate
