econ chapter 27
If you are out shopping for clothes and books, what is easiest and most convenient for you to spend: M1 or M2? Explain your answer.
The currency and checks in M1 are easiest to spend. It is harder to spend M2 directly, although if there is an automatic teller machine in the shopping mall, you can turn M2 from your savings account into an M1 of currency quite quickly. If your answer is about "credit cards," then you are really talking about spending M1—although it is M1 from the account of the credit card company, which you will repay later when you credit card bill comes due.
reserves
funds that a bank keeps on hand and that are not loaned out or invested in bonds
fiat money
has no intrinsic value, but is declared by a government to be the legal tender of a country
payment system
helps an economy exchange goods and services for money or other financial assets
store of value
something that serves as a way of preserving economic value that can be spent or consumed in the future
smart card
stores a certain value of money on a card and then the card can be used to make purchases
Explain why the money listed under assets on a bank balance sheet may not actually be in the bank?
A bank's assets include cash held in their vaults, but assets also include monies that the bank holds at the Federal Reserve Bank (called "reserves"), loans that are made to customers, and bonds.
In many casinos, a person buys chips to use for gambling. Within the walls of the casino, these chips can often be used to buy food and drink or even a hotel room. Do chips in a gambling casino serve all three functions of money?
As long as you remain within the walls of the casino, chips fit the definition of money; that is, they serve as a medium of exchange, a unit of account, and a store of value. Chips do not work very well as money once you leave the casino, but many kinds of money do not work well in other areas. For example, it is hard to spend money from Turkey or Brazil at your local supermarket or at the movie theater.
Can you name some item that is a store of value, but does not serve the other functions of money?
Many physical items that a person buys at one time but may sell at another time can serve as an answer to this question. Examples include a house, land, art, rare coins or stamps, and so on.
For the following list of items, indicate if they are in M1, M2, or neither: Your $5,000 line of credit on your Bank of America card $50 dollars' worth of traveler's checks you have not used yet $1 in quarters in your pocket $1200 in your checking account $2000 you have in a money market account
Neither in M1 or M2 That is part of M1, and because M2 includes M1 it is also part of M2 Currency out in the public hands is part of M1 and M2 Checking deposits are in M1 and M2 Money market accounts are in M2
t-account
a balance sheet with a two-column format, with the T-shape formed by the vertical line down the middle and the horizontal line under the column headings for "Assets" and "Liabilities"
asset-liability time mismatch
a bank's liabilities can be withdrawn in the short term while its assets are repaid in the long term
bank capital
a bank's net worth
m2 money supply
a definition of the money supply that includes everything in M1, but also adds savings deposits, money market funds, and certificates of deposit
M1 money supply
a narrow definition of the money supply that includes currency and checking accounts in banks, and to a lesser degree, traveler's checks.
double coincidence wants
a situation in which two people each want some good or service that the other person can provide
time deposit
account that the depositor has committed to leaving in the bank for a certain period of time, in exchange for a higher rate of interest; also called certificate of deposit
balance sheet
an accounting tool that lists assets and liabilities
financial intermediary
an institution that operates between a saver with financial assets to invest and an entity who will borrow those assets and pay a rate of return
commodity money
an item that is used as money, but which also has value from its use as something other than money
liability
any amount or debt owed by a firm or an individual
savings deposit
bank account where you cannot withdraw money by writing a check, but can withdraw the money at a bank—or can transfer it easily to a checking account
demand deposit
checkable deposit in banks that is available by making a cash withdrawal or writing a check
commodity-backed currencies
dollar bills or other currencies with values backed up by gold or another commodity
credit card
immediately transfers money from the credit card company's checking account to the seller, and at the end of the month the user owes the money to the credit card company; a credit card is a short-term loan
depository institution
institution that accepts money deposits and then uses these to make loans
asset
item of value owned by a firm or an individual
debit card
like a check, is an instruction to the user's bank to transfer money directly and immediately from your bank account to the seller
diversify
making loans or investments with a variety of firms, to reduce the risk of being adversely affected by events at one or a few firms
standard of deferred payment
money must also be acceptable to make purchases today that will be paid in the future
coins and currency in circulation
the coins and bills that circulate in an economy that are not held by the U.S Treasury, at the Federal Reserve Bank, or in bank vaults
unit of account
the common way in which market values are measured in an economy
transaction costs
the costs associated with finding a lender or a borrower for money
money market fund
the deposits of many investors are pooled together and invested in a safe way like short-term government bonds
net worth
the excess of the asset value over and above the amount of the liability; total assets minus total liabilities
money multiplier formula
total money in the economy divided by the original quantity of money, or change in the total money in the economy divided by a change in the original quantity of money
barter
trading one good or service for another, without using money
medium of exchange
whatever is widely accepted as a method of payment
money
whatever serves society in four functions: as a medium of exchange, a store of value, a unit of account, and a standard of deferred payment.