Krugman Textbook Chapter 14 Flashcards
Money
Any asset that can easily be used to purchase goods and services.
Currency in Circulation
Actual cash held by the public.
Chequeable/Demand Deposits
Bank accounts on which people can write cheques.
Money Supply
The total value of financial assets in the economy that are considered money.
Medium of Exchange
An asset that individuals acquire for the purpose of trading for goods and services rather than for their own consumption.
Store of Value
An asset that is a means of holding purchasing power over time.
Unit of Account
A measure used to set prices and make economic calculations.
Commodity Money
A medium of exchange that is a good, normally gold or silver, which has intrinsic value in other uses.
Commodity-backed Money
A medium of exchange that has no intrinsic value whose ultimate value is guaranteed by a promise that it ca be converted into valuable goods on demand.
Fiat Money
A medium of exchange whose value derives from its official status as a means of payment.
Monetary Aggregate
An overall measure of the money supply. The most common monetary aggregates in Canada range from M1, the narrowest category (cash and all chequeable deposits at chartered banks), to M3, the broadest category (cash, all deposits in financial institutions, and money market funds).
Near-moneys
Financial assets that can’t be directly used as a medium of exchange but can be readily converted into cash or chequeable deposits.
Bank Reserves
Currency held by banks in their vaults plus their deposits at the Bank of Canada.
T-account
A simple tool that summarizes a business’s financial position by showing in a single table the business’s assets and liabilities, with assets on the left and liabilities and equity on the right.
Reserve Ratio
The fraction of bank deposits that a bank holds as reserves. Banks in Canada hold whatever reserve ratio they think is appropriate to avoid running out of cash.
Bank Run
A phenomenon in which many of a bank’s depositors try to withdraw their funds due to fears of a bank failure.
Deposit Insurance
A guarantee 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.
Capital Requirements
Government rules imposed on a bank account to ensure the bank holds more assets than the value of its deposits, thus reducing the possibility of a bank run.
Reserve Requirements
Rules set by the central bank that determines the minimum reserve ratio for banks.
Desired/Voluntary Reserve Ratio
The fraction of bank deposits that banks want to hold as reserves.
Excess Reserves
A bank’s reserves over and above its desired (or voluntary) reserve ratio.
Monetary Base
The sum of currency in circulation and bank reserves.
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.
Overnight Funds Market
A financial market in which financial institutions, such as banks that are short of reserves can borrow funds from banks with excess reserves.
Overnight Rate
The interest rate determined in the overnight funds market.
Target for the Overnight Rate
The Bank of Canada’s official key policy interest rate.
Bank Rate/ Discount Rate
The rate of interest a central bank charges on loans to banks. In many countries, this rate of interest is known as the discount rate.
Open-Market Operation
The purchase or sale of assets by a central bank. For the Bank of Canada, normally these assets are Government of Canada bonds, but they may also be foreign currency.
Deposit Switching
The shifting of government deposits between the Bank of Canada and the commercial banks. It is a major tool used by the Bank of Canada in its day to day operations.
Commercial Bank
A bank that accepts deposits and is covered by deposit insurance.
Leverage
The degree to which financial institution is financing its investments with borrowed funds.
Balance Sheet Effect
The reduction in a firm’s net worth from falling asset prices.
Vicious Cycle of Deleverage
Describes the sequence of events that take place when a firm’s asset sales to cover losses produce negative balance sheet effects on other firms and force creditors to call in their loans, forcing more sales of assets and causing further declines in asset prices.
Sub-prime Lending
Lending to home-buyers who don’t meet the usual criteria for borrowing.
Securitization
The pooling of loans and mortgages made by financial institutions and the sale of shares in such a pool to other investors.
Investment Bank
A bank that trades in financial assets and is not covered by deposit insurance.
