Chapter 12: Money, Banking and the Financial System Flashcards
Money
Any good that is widely accepted for purposes of exchange and the repayment of debt.
3 Major functions of money
- Medium of exchange
- Unit of account
- Store of value
Barter
Exchanging goods and services for other goods and services without the use of money.
Medium of Exchange
Anything that is generally acceptable in exchange for goods and services
Unit of Account
A common measure in which relative values are expressed
Store of Value
The ability of an item to hold value over time
Double Coincidence of Wants
In a barter economy, a requirement which must be met before a trade can be made. It specifies that a trader must find another trader who at the same time is willing to trade what the first trader wants and wants what the first trader has.
M1
Currency held outside banks plus checkable deposits plus traveler’s checks.
Currency
Coins and paper money
Federal Reserve Notes
Paper money issued by the Federal Reserve
Checkable Deposits
Deposits on which checks can be written
M2
M1 plus savings deposits (including money market deposit accounts) plus small-denomination time deposits plus money market mutual funds (retail).
Savings Deposit
An interest-earning account at a commercial bank or thrift institution.
Normally, checks cannot be written on savings deposits and the funds in a savings deposit can be withdrawn at any time without a penalty payment.
Time Deposit
An interest-earning deposit with a specified maturity date.
They are subject to penalties for early withdrawal, that is withdrawal before the maturity date.
Money Market Deposit Account (MMDA)
An interest-earning account at a bank or thrift institution for which a minimum balance is usually required and most of which offer limited check-writing privileges.
Money Market Mutual Fund (MMMF)
An interest-earning account at a mutual fund company, for which a minimum balance is usually required and most of which offer limited check-writing privileges. Only retail MMMFs are part of M2.
Fractional Reserve Banking
A banking arrangement that allows banks to hold reserves equal to only a fraction of their deposit liabilities.
Federal Reserve System (the Fed)
The central bank of the United States.
Reserves
The sum of bank deposits at the Fed and vault cash.
Required Reserve Ratio (r)
A percentage of each dollar deposited that must be held in reserve form
Required Reserves
The minimum dollar amount of reserves a bank must hold against its checkable deposits as mandated by the Fed.
Reserve Requirement
The Fed rule that specifies the amount of reserves a bank must hold to back up deposits.
Excess Reserves
Any reserves held beyond the required amount; the difference between (total reserves and required reserves.
Direct Finance
Borrowers and lenders come together in a market setting, such as in the bond market.
Indirect Finance
Funds are loaned an borrowed through a financial intermediary.
Financial Intermediary
A financial intermediary transfers funds from those who want to lend funds to those who want to borrow them.
Asymmetric Information
Relates to an economic agent on one side of a transaction having information that an economic agent on the other side of the transaction does not have.
Adverse Selection
A phenomenon that occurs when the parties on one side of the market, who have information not known to others, self-select in a way that adversely affects the parties on the other side of the market.
Moral Hazard
A condition that exists when one party to a transaction changes his or her behavior in a way that is hidden from and costly to the other party.
Balance Sheet
A record of the assets and liabilities of a bank.
Asset
Anything of value that is owned or that one has claim to.
Liability
Anything that is owed to somebody else.
Insolvency
A condition in which one’s liabilities are greater than one’s assets.
