What Money Is, Money and Banking, Money Market Flashcards
the three purposes of money
- store of value - to transfer purchasing power from the present to the future
- unit of account - the terms in which prices are quoted and debts are recorded
- medium of exchange - what we use to buy goods and services
denotes the amount of currency in circulation i.e., currency bills, coins, and bank reserves
M0 or monetary base
includes M0 and other liquid deposits in bank,
e.g., demand deposits, checking account deposits, and traveler’s check
M1 or narrow money
adds to M1 other assets that are not quite as
liquid as those included in M1, such as assets that have check-writing
features and other assets that can be turned into cash quickly and at very little cost
M2 or broad money
include M2 plus money substitutes
such as promissory notes and commercial papers
M3 or broad money liabilities
M3 plus transferable deposits, treasury bills
and deposits held in foreign currency deposits; almost all short-term,
highly liquid assets will be included in this measure
M4 or liquidity money
the price paid for borrowing money is ___
the interest rate
a certificate of indebtedness that specifies the obligations
of the borrower to the buyer
bond
the time at which the loan will be repaid
the date of maturity
the amount borrowed in a bond
principal
The price of a bond and the interest rate it pays are ____ related
negatively/inversely
how do banks obtain funds? why?
by borrowing and issuing other liabilities such as deposits; to acquire assets such as loans and bonds
a statement of a firm’s
financial position at a point in time; it lists assets (items that the
bank owns) and liabilities (items that the bank owes)
bank balance sheet
a special asset that consists of currency held by the bank and the bank’s deposits with the central bank
reserves
why do banks have an incentive to make loans to individuals and firms?
because they can charge interest on these loans
a bank need not keep all its deposits in reserve when
amount of new deposits = amount of withdrawals
This is the practice whereby a bank
accepts deposits and holds reserves that are a fraction of the amount
of its deposit liabilities.
fractional-reserve banking
Bank money = total reserves x 1/reserve ratio (money multiplier)
what is reserve ratio?
the fraction of total deposits banks keep as reserves
what is the primary difference between banks and other financial institutions?
the banking system’s ability to create money
the process of transferring funds from savers to borrowers is called ___
financial intermediation
why are banks the only financial institutions that directly influence the money supply?
because only banks have the legal authority to create assets that are part of the money supply
Money supply in the real world is determined by ____, ____, and _____.
the Bangko Sentral ng Pilipinas (BSP); the banking system; consumers
expansionary monetary policy
if the money supply is increased by the central bank
contractionary monetary policy
if the money supply is decreased by the central bank
the three instruments of monetary policy
Open market operations (OMO), Discount-window lending, Reserve-requirements policy
the central bank’s primary tool for implementing monetary policy; activities whereby the central bank affects bank
reserves by buying or selling government securities (bonds) on the
open market.
Open Market Operations
a facility from which banks can borrow
when they need additional funds
discount window
the central bank charges a ____ on borrowed funds
discount rate
the fraction of deposits that banks hold in reserve; determined by the business policies of banks and the laws regulating banks
reserve-deposit ratio (re)
the amount of currency CU people
hold as a fraction of their holdings of demand deposits DD; reflects the preferences of households about the form of money they wish to hold
currency-deposit ratio (cu)
two features of money that are particularly important
- money is the most liquid asset
- money pays a low return
What is the cost of holding money?
The cost of holding money is the interest forgone from not holding other assets.
three variables that affect money demand
price level, real income, nominal interest rate
