Chapter 14 - Money and Banking Flashcards
Barter
Trading one good or service for another
Double coincidence of wants
2 people each want some good or service that the other person can provide
Medium of exchange
Money acts as an intermediary between the buyer and the seller
Four functions of money
Medium of exchange, store of value, unit of account, standard of deferred payment
Store of value
Something that serves as a way of preserving economic value that can be spent or consumed in the future
Unit of account
The ruler by which other values are measured
Standard of deferred payment
Money is usable today to make purchases, it must also be acceptable to make purchases today that will be paid in the future
Commodity money
Gold, shells, things that have value that can be used to trade
Commodity-backed money
Bills that are backed by a commodity like gold
Fiat money
Has no intrinsic value, but is declared by a government to be the legal tender of a country. Not backed by a commodity
Liquidity
How quickly something can be converted into cash
M1 money supply
Very liquid assets like cash, checkable (demand) deposits, and traveler’s checks
M2 money supply
Less liquid assets like savings and time deposits, certificates of deposits, and money market funds, plus all of M2 money supply
Coins and currency in circulation
Coins and bills that circulate in an economy that are not held by the U.S. Treasury, at the Federal Reserve Bank, or in bank vaults
Checking/demand deposits
Amounts held in checking accounts
Savings deposits
Bank accounts on which you cannot write a check directly, but from which you can easily withdraw the money at an automatic teller machine or bank
Money market funds
Deposits of many individual investors are pooled together and invested in a safe way
Certificates of deposits or time deposits
Accounts that the depositor has committed to leaving in the bank for a certain period of time in exchange for a higher interest rate
Debit card
Instruction to the user’s bank to transfer money directly and immediately from your bank account to the seller.
Credit card
Not money, a short-term loan from the credit card company
Smart card
Store a certain value of money on the card and then use the card to make purchases
Payment system
Helps an economy exchange goods and services for money or other financial assets
Transaction costs
Costs associated with finding a lender or a borrower for money
Financial intermediary
Institution that operates between a saver who deposits money in a bank and a borrower who receives a loan from that bank.
Depository institutions
Institutions that accept money deposits and then use these to make loans
Balance sheet
Financial statement that takes snap shot on a specific date of a company’s financial state
Asset
Anything owned of value
Liability
Any debts that are owed
Net worth (Owner’s equity)
Anything left over after subtracting liabilities from assets
Bank capital
A bank’s net worth
T-account
A balance sheet with a two-column format, with the T-shape formed by the vertical line down the middle and the horizontal line under the column headings for “Assets” and “Liabilities”
Primary loan market
Where loans are made to borrowers
Reserves
Money that the bank keeps on hand, and that is not loaned out or invested in bonds
Diversify
Making loans or investments with a variety of firms, to reduce the risk of being adversely affected by events at one or a few firms
Three bank assets
Bonds, reserves, and loans
When a bank will run a negative net worth
When the value of their assets declines
Money multiplier formula
1 / reserve requirement
Money multiplier
Quantity of money that the banking system can generate from each $1 of bank reserves
