Rotation 2 Chapters 25, 26, 28, 29, 30 Flashcards
An item that buyers give to sellers when they want to purchase goods and services
Medium of exchange
The yardstick people use to post prices and record debts
Unit of account
An item that people can use to transfer purchasing power from the present to the future
Store of value
The ease with which an asset can be converted into the economy’s medium of exchange.
Liquidity
Money that takes the form of a commodity with intrinsic value
Commodity money
Money without intrinsic value that is used as money because of government decree
Fiat money
The paper bills and coins in the hands of the public
Currency
Balances in bank accounts that depositors can access on demand by writing a check
Demand deposits
The central bank of the United States
Federal Reserve (Fed)
An institution designed to oversee the banking system and regulate the quantity of money in the economy
Central bank
The quantity of money available in the economy
Money supply
The setting of the money supply by policymakers in the central bank
Monetary policy
Deposits that banks have received but have not loaned out
Reserves
A banking system in which banks hold only a fraction of deposits as reserves
Fractional-reserve banking
The fraction of deposits that banks hold as reserves
Reserve ratio
The amount of money the banking system generates with each dollar of reserves
Money multiplier
The resources a bank’s owners have put into the institution
Bank capital
The use of borrowed money to supplement existing funds for purposes of investment
Leverage
The ratio of assets to bank capital
Leverage ratio
A government regulation specifying a minimum amount of bank capital
Capital requirement
The purchase and sale of U.S. government bonds by the Fed
Open-market operations
The interest rate on the loans that the Fed makes to banks
Discount rate
Regulations on the minimum amount of reserves that banks must hold against deposits
Reserve requirements
The interest rate at which banks make overnight loans to one another
Federal funds rate
The set of assets in an economy that people regularly use to buy goods and services from other people
Money
A theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate
Quantity theory of money
Variable measured in monetary units
Nominal variables
Variables measured in physical units
Real variables
The theoretical separation of nominal and real variables
Classical dichotomy
The proposition that changes in the economy do not affect real variables
Monetary neutrality
The rate at which money changes hands
Velocity of money
The equation M x V = P x Y, which relates the quantity of money, the velocity of money, and the dollar value of the economy’s output of goods and services
Quantity equation
The revenue the government raises by creating money
Inflation tax
The one for one adjustment of the nominal interest rate to the inflation rate
Fisher effect
The resources wasted when inflation encourages people to reduce their monetary holdings
Shoeleather cost
The costs of changing menus
Menu costs
