ECON 200 Handout 6 Key Terms Flashcards
Store of Value
One of three roles of money; retaining its value over time
Medium of Exchange
One of three roles of money; be used and reused to carry out purchases of goods, services and other assets,
Unit of Account
One of three roles of money; At which the prices of goods, services, and assets are quoted
Fractional Reserve Banking (Banking)
use other people’s money to lend out to other people at a high enough interest rate to make a profit.
Demand Deposits
Promises on the part of the bank to return the currency “on demand” (when asked).
Reserves
Currency deposited in banks
Monetary Base
The sum of currency and reserves
Defaults
What happens when loans are never repaid
Money Supply (M^s)
The aggregate quantity of money currently in existence
M^s=CU+R/rr
Money Multiplier (Deposit Creation Multiplier)
Increases in M^S that grow from the initial currency; varies with the share of deposits banks retain as reserves (reserves/deposits)
Reserve Ratio (rr)
The size of the money multiplier
Central Bank
An arm of the government that decides the size of the monetary base; has monetary authority
Open Market Operations
Where open market purchases (of bonds) increase the monetary base and open market sales decrease it
Currency/Deposit Ratio
How much money the population decides to hold
Excess Reserves
Reserves in excess of the minimum required by the Fed (US central bank)
M1
Composed of checking deposits and CU
M2
Includes savings and money market accounts in addition to M1
Money Demand (M^D)
Demand of money
Transactions Motive
One of two reasons why people demand money; money is demanded since it is required to carry out transactions
Asset Motive
One of two reasons why people demand money; money can be spent without being held because-as an asset-it will retain its value over time while leaving the option to be spent if needed
Monetarist Theory
Views M^D=M^S as an equilibrium condition
Aggregate Demand
Increases in spending on goods and services across the economy
