Chapter 9: Money Flashcards
money
any item that both buyers and sellers will generally accept in exchange for goods and services
medium of exchange
any item used to facilitate trade between buyers and sellers; one of the functions of money
unit of account
a measurement unit that allows buyers and sellers to easily compare the value of different goods, services, and resources; one of the functions of money
store of value
a characteristic of certain assets that enables them to transfer wealth from the present into the future; one of the functions of money
what are the 3 functions of money?
- medium of exchange 2. unit of account 3. store of value
liquidity
the degree to which an asset can be readily converted into currency
currency
physical units of money such as cash and coins
demand deposits
money held in an account that can be converted to currency on demand (AKA checking account balances, checkable deposits)
traveler’s check
a certificate, or check that can be converted to currency
M1
the most liquid measure of money supply (i.e. demand deposits, traveler’s checks, currency, and other checkable deposits)
M2
a broader measure of money supply that includes M1 (i.e. savings deposits, small-denomination time deposits, money market mutual funds)
time deposit
money held in an account that cannot be converted to currency without penalty before a specified time
money market mutual fund
a demand deposit that accepts deposits and purchases short-term bonds and commercial debt in order to pay interest on the deposited funds
equation of exchange
M (money supply) x V (Velocity) = P (Price Level) x Y(Real GDP)
nominal variables
variables measured in monetary units or prices
real variables
variables measured in numerical units or units of output
classical dichotomy
the idea that real variable such as employment and output are independent from nominal variables like money
velocity of money
the number of times on average and in a given time period that each dollar in a nation’s money supply is used to make purchases
nominal expenditures
P(price level) x Y(real GDP)
real expenditures
M(money supply) x V(velocity)
Federal Reserve System
the central bank of the US, consisting of 12 regional banks and the Board of Governors
What does The Fed do? (functions)
- conduct monetary policy
- supervises and regulates banks
- provides financial services to the US government
Federal Reserve Board / Board of Governors
- the governing organization of The Fed
- members appointed by the US president and confirmed by the Senate
- serve 14 years
Federal Open Market Committee (FOMC)
- a committee of The Fed that is responsible for monetary policy decisions specifically for open market operations for The Fed
- Federal Reserve board + president of the NY Fed + 4 of the 11 other regional presidents
central bank
a bank that provides financial services to a country’s government and is responsible for the nation’s monetary policy (for the US it’s The Fed)
monetary policy
the actions taken by a country’s central bank to influence the supply of money and credit in the economy
open market operations
the purchase or sale of government securities by a central bank; used to influence the money supply and interest rates
discount rate
interest rate at which banks can borrow money directly from the Federal Reserve
reserve requirement (rr)
the fraction of checkable deposits that banks must keep on hand as reserves either as currency or on deposit with Federal Reserve
monetary policy tools
- open market operations
- discount rate
- reserve requirement
excess reserves
amount of reserves that a bank can lend out to earn interest;
= total reserves - required reserves
required reserves
amount of reserves that a bank must keep on hand to meet regulatory requirements
= deposits x rr(reserve requirement)
total reserves
total amount of reserves that a bank has;
= required reserves + excess reserves
asset
any item of value that is owned by an individual or corporation
liability
a monetary debt or obligation
balance sheet
a statement of assets, liabilities, and net worth
fractional reserve banking
a banking system in which banks have to keep only a fraction of checkable deposit on hand and available for withdrawal
money mulitplier
the amount by which $1 change in reserves will change the money supply
=1/rr
change in money supply
1 / rr x changes in reserves
interest
a fee for the use of money over time; payment made to lender
interest rate
payment made to agents that lend or save money expressed as an annual percentage of monetary amount lent or saved (AKA price of money; nominal interest rate); PRICE OF MONEY
money market
a market in which the demand for and supply of money determine an interest rate or opportunity cost of holding money balances
transaction demand
the demand for money to be used in daily transactions
asset demand
the demand for money to be saved for future use
money demand
the relationship between the interest rate and the quantity of money demanded all else held constant; the sum of the transaction demand and asset demand for money
money supply
the relationship between the interest rate and the quantity of money supplied in an economy; usually a given value; in the US, M=M2
money supply curve
a graphical representation of money supply
surplus
quantity supplied is greater than quantity demanded
shortage
quantity demanded is greater than quantity supplied
determinants of money demand
transaction demand
asset demand
determinants for money supply
changes in rr
changes in excess reserves
changes in willingness to lend
yield
the effective interest rate earned on a bond or another asset
yield = net profit earned / amount invested
bond
a financial agreement that obligates a borrower to repay the amount borrowed and interest on a specific date in the future
bond market
financial market in which participants can buy and sell new bounds or trade bonds already in circulation
supply of bonds
the relationship between the interest rate and the quantity of bonds supplied in an economy all else held constant
demand for bonds
the relationship between the interest rate and the quantity of bonds demanded in an economy all else held constant
face value
nominal or dollar value of a security; generally printed on the face of the security; for bonds it’s the amount paid to the bondholder when repaid
coupon rate
interest rate stated on a bond, as a percentage of the bond’s face value
bond yield
interest payment / bond cost
real interest rate
interest rate paid to lenders and savers when the expected rate of inflation equals zero
expected inflation
rate of inflation anticipated by market participants (phi^e)
fisher equation
w/out inflation
i (nominal interest rate) = r (real interest rate)
w/inflation
i = r + expected inflation
A bond specifies the following terms:
- length/term of maturity 2. interest paid/interest rate/coupon rate 3. face value/dollar amount returned at expiration
