Chapter 14 Flashcards
Commodity Money
a good used as money that also has value independent of its use as money
Fiat Money
Money that is authorized by a central bank or governmental body and does not have to be exchanged by the central bank for other commodity money
The use of money…
eliminates the double coincidence of wants, reduces the transaction costs of exchange, allows for greater specialization
Money serves as a unit of account when prices of ___ __ ______ are stated in terms of money
goods and services
Money serves as a standard of deferred payment when…
payments agreed to today but made in the future are in terms of money
define M1
the sum of currency in circulation, checking account deposits in banks, and holdings of travelers checks.
define M2
includes M1 plus savings account deposits, small denomination time deposits, balances in money market deposit accounts in banks, and non institutional money market fund shares
How do banks “create money”?
When there is an increase in checking account deposits, banks gain reserves and make new loans, and the money supply expands
Simple deposit multiplier formula
1/RR
Reserves
deposits that a bank keeps as cash in its vault or on deposit with the Federal Reserve
Required reserves
reserves that a bank is legally required to hold, based on its checking account deposits
Required reserve ratio
the minimum fraction of deposits banks are required by law to keep as reserves
Excess reserves
reserves that banks hold over and above the label requirement
= total reserves - required reserves
Fractional Reserve banking system
a banking system in which banks keep less than 100% of deposits as reserves
hyperinflation
Very high rates of inflation
