Macro Unit 4 Flashcards
The three functions of money
- A medium of exchange- used to easily buy goods and services
- A unit of account (a measure of value)- measures the value of all goods and services
- A store of value- allows you to store purchasing power for the future
The financial sector
network of institutions that link borrowers and lenders including banks, mutual funds, pension funds, and other financial intermediates.
Assets
any item of economic value that you own
Liabilities
anything that is owed
Liquidity
the ease with which an asset can be accessed and used as a medium of exchange.
commodity money
commodity money performs the function of money and has intrinsic value.
fiat money
Fiat money serves as money but has no other value.
M1 money supply
M1 money supply has the highest liquidity; includes currency in circulation, checking and savings accounts, and deposits in money market accounts.
M2 money supply
M2 money supply is all of M1 plus time deposits and money market funds.
M2 money supply will always be larger than that of M1
Bond
Bonds are loans (or official IOUs) that represent debt that the government, businesses, or individuals must repay to the lender
the bond holder has no ownership of the company
Demand deposits
Money deposited in a bank in a checking account (direct deposit)
Required reserves
The minimum amount of deposits banks must hold by law
Excess reserves
The amount that the bank can loan out
Excess + required reserve = total reserve
Fractional Reserve Banking
System where banks are forced to keep a fraction of your deposits physically at the bank in case you want to take cash out
Balance sheet
A record of a banks assets and liabilities
Owner’s equity
The amount of money the owner put into the company
doesn’t need to be held in reserve
Money multiplier equation
1/reserve requirement
Cash in circulation=(initial deposit)(multiplier)
Transaction demand for money
When people hold money for everyday transactions
Asset demand for money
When people hold onto money because it is less risky than other assets (like bonds)
Shifters in money demand
- Changes in price level
- Changes in income
- Changes in technology
The money market graph
- Shows the relationship between the supply and demand of money
- Nominal interest rate on the y-axis and quantity of money on the x axis
- Money demanded is downward sloping just like other demand graphs
- Money supplied is vertical
Monetary policy
When the FED adjusts the money supply to move the economy
Monetary base vs money supply
The monetary base is the money printed at the mint (includes money in circulation and demand deposits) whereas the money supply is the money in circulation after the multiplier effect (includes money in circulation and total reserves)
Three things banks can do if a customer withdrawals more than the amount of excess reserves
- Borrow from the FED
- Borrow from another bank
- Sell treasury bonds*
*not as common/important
