Chapter 14 Flashcards
Money
An asset that can easily be used to purchase goods and services
Currency in circulation
Cash held by the public
Checkable bank deposits
Bank accounts on which people can write checks
Money supply
The total value of financial assets in the economy that are considered to be money
Three main roles of money in an economy:
- Medium of exchange
- Store of Value
- Unit of account
Medium of exchange
An asset that individuals acquire for the purpose of trading goods and services rather than for their own consumption
Store of value
A means of holding purchasing power over time
Unit of activity
A measure used to set prices and make economic calculations
Commodity money
A good used as a medium of exchange that has intrinsic value in other uses
Commodity-backed money
A medium of exchange with no intrinsic value whose ultimate value is guranteed by a promise that it can be converted into valuable goods
Fiat money
A medium of exchange whose value derives entirely from its official status as a means of payment
Monetary aggregate
Overall measure of the money supply
Near-moneys
Financial assets that can’t be directly used as a medium of exchange but can readily converted into cash or checkable bank deposits
Bank reserves
The currency banks hold in their vaults plus their deposits at the Federal Reserve.
T-account
a tool for analyzing a business’s financial position by showing, in a single table, the business’s assets (on the left) and liabilities (on the right).
Reserve ratio
The fraction of bank deposits that a bank holds as reserves
Bank failure
The bank would be unable to pay off its depositors in full
Bank run
A phenomenon in which many of a bank’s depositors try to withdraw their funds due to fears of bank failure
Discount window
A source of cash when it’s needed
Banks have access to this to protect from bank runs
Deposit insurance
Guarantees that a bank’s depositors will be paid even if the bank can’t come up with the funds, up to a maximum amount per account
Bank’s capital
The excess of a bank’s assets over its bank deposits and other liabilities
Reserve Requirements
Rules set by the Federal Reserve that determine the minimum reserve ratio for banks
10% for checkable bank deposits
Discount window
An arrangement in which the Federal Reserve stands ready to lend money to banks in trouble
Four features of banks to protect against Bank Runs:
Deposit Insurance
Capital Requirements
Resere Requirements
Discount Window
Excess reserves
A bank’s reserves over and above its required reserves
Increase in checkable bank deposits from $1,000 in excess reserves =
$1,000/rr
Monetary base
The sum of currency in circulation and bank reserves
The quantity the monetary authorities control
Checkable bank deposits
A part of the money supply because they are available for spending, aren’t part of the monetary base
Money supply consists of:
currency in circulation
checkable or near checkable bank deposits
Why is the money supply larger than the monetary base?
Because each dollar of bank reserves backs several dollars of bank deposits
Money multiplier
The ratio of the money supply to the monetary base
Central bank
An institution that oversees and regulates the banking system and controls the monetary base
The Federal Reserve Bank of New York plays a special role:
It carries out open-market operations
*usually the main tool of monetary policy
federal funds market
Allows banks that fall short of the reserve requirement to borrow funds from banks with excess reserves
federal funds rate
The interest rate determine in the federal funds market
Three main policy tools of the FED
Reserve requirements
Discount rate
Open-market operations
Banks in need of reserves can borrow from the FED itself via the _____________
discount window
Discount rate
The rate of interest the Fed charges on loans to banks
Open-market operation
A purchase or sale of government debt by the FED
commercial bank
banks that mainly make business loans, as opposed to home loans
Eurozone
the group of countries that have adopted the euro as their currency
commercial banks
Accept deposits and are covered by deposit insurance
Investment bank
Trades in financial assets and is not covered by deposit insurance
Savings and loan (thrift)
Another type of deposit-taking bank, usually specialized in issuing home loans
leverage
A financial insitution engages in leverage when it finances its investments with borrowed funds
Balance sheet effect
The reduction in a firm’s net worth due to falling asset prices
Vicious cycle of deleveraging
Takes place when asset sales to cover losses produce negative balance sheet effects on other firms and force creditors to call in their loans, forcin sales of more assets and causing further declines in asset prices
subprime lending
Lending to home-buyers who don’t meet the usual criteria for being able to afford their payments
securitization
A pool of loans is assembled and shares of that pool are sold to investors
TED spread
Shoows the difference between the interest rate on three-month loans that banks make to each other and the interest rate the federal government pays on three-month loans
