MONEY Flashcards
The Nature of Money
- Money is a medium of exchange, a unit of account, and a store of value
- Money avoids the need of “double coincidence of wants”
The Origins of Money
- based primarily on precious metal like gold and silver
The Barter System
Goods and services are traded directly. There is no money exchanged.
Commodity Money
Something that performs the function of money and has instrinsic value.
Eg. gold, silver, cigarettes, etc
Flat Money
Something that serves as money but has no other value or uses.
Eg. paper money, coins, digital currency
What are the 3 functions of money?
- Medium of Exchange - money can easily be used to buy goods & services with no complications of barter system.
- A Unit of Account - money measures the value of all goods and services, it acts as a measurement of value.
- A Store of Value - money allows you to store purchasing power for the future.
Classifying Money - Liquidity
Liquidity - ease with which an asset can be assessed and used as a medium of exchange.
M1 (Highest Liquidity)-
1. Currency in circulation
2. Checkable bank deposits (checking accounts)
3. Traveler’s checks
What is the Federal Reserve?
Created in 1913, the FED’s job is to regulate banks and to conduct monetary policy.
What is Fractional Reserve Banking?
When banks hold only a small portion of deposits to cover potential withdrawals and then loans the rest of the money out.
Demand Deposits
Money deposited in a commercial bank in checking accounts
Required Reserves
The percent that banks must hold by law
Excess Reserves
The amount that the bank can loan out
The Money Multiplier Formula
1/ reserve requirement (ratio)
Reasons for the Demand of Money
- Transaction Demand for Money - People hold money for everyday transactions
- Asset Demand for Money - People hold money since it is less risky than other assets
Increasing the Money Supply
Expansionary Monetary Policy
- increase money supply
- decreases interest rate
- increases investment
- increases AD
Decreasing the Money Supply
Contractionary Monetary Policy
- decrease money supply
- increase interest rate
- decrease investment
- decreases AD
3 Shifters of Money Supply
- The Reserve Requirement
- The Discount Rate
- Open Market Operations
The Reserve Requirement
aka Reserve ratio, is the percent of deposits that banks must hold in reserve ( the % they can NOT loan out)
The Discount Rate
The interest rate that the FED charges commercial banks
Open Market Operations
When the FED buys or sells government bonds (securities)
Federal Funds Rate
The interest rate that banks charge one another for one-day loans of reserves
Loanable Funds Market
The private sector supply and demand of loans. This market shows the effect on REAL INTEREST RATE.
Demand - Inverse relationship between real interest rate and quantity loans demanded
Supply - Direct relationship between real interest rate and quantity loans supplied
