AP Econ Money and Banking Vocabulary
Fractional-Reserve Banking
A banking system in which banks hold only a fraction of deposits as reserves
Federal Open Market Committee
A branch of the Federal Reserve Board that makes monetary policy decisions
Credit Card
A card issued by a financial company giving the holder the option to borrow funds usually at the point of sale (when you want to buy something)
Bond
A certificate of indebtedness from the issuer to the holder of this (an IOU issued by a borrower with a promise to pay by a certain date)
Stock
A certificate that represents a claim to or share of the ownership of a firm
Commercial Bank
A financial institution that provides services to the general public and to companies, such as accepting deposits and making loans
Bank
A financial intermediary that provides liquid assets in the form of bank deposits to lenders and uses those funds to finance the illiquid investments or investment spending needs of borrowers
Capital Requirement
A government regulation specifying a minimum amount of bank capital
Liabilities
A legal debt or financial obligation that must be paid back
Liquidity
A measure of how easily an asset can be converted into cash
M2
A measure of money that includes the following: M1 + savings deposits + small time deposits (small, short-term CDs) + money market and mutual fund balances
M3
A measure of money that includes the following: M2 + larger time deposits (bigger, longer-term CDs)
Reserve Requirements
A regulation on the minimum amount of reserves that banks must hold against deposits
Assets
A resource with economic value
T-Account
A way to express a bank's balance sheet; on the left side, assets are listed; on the right side, liabilities are listed
Bank Loan
An amount of money loaned by a bank at interest to a borrower for a certain period of time
Illiquid Asset
An asset that can NOT easily be converted to cash without losing much value
Liquid Asset
An asset that can easily be converted to cash without losing much value
Central Bank
An institution designed to oversee the banking system and regulate the quantity of money in the economy
Discount Window
An instrument of monetary policy that allows qualifying institutions to borrow from the Federal Reserve
Medium of Exchange
An item that buyers give to sellers when they want to purchase goods and services
Store of Value
An item that people can use to transfer purchasing power from the present to the future
Demand Deposits
Balances in bank accounts that depositors can access on demand by writing a check or using a debit card (this is the value of assets in your checking account)
Cash Leakage
Money flowing out of the banking system because it is held as cash rather than being deposited in a financial institution
Commodity Money
Money that takes the form of a commodity with intrinsic value (ex. gold, silver, etc.)
Fiat Money
Paper and coin money used to make transactions because the government declares it to be legal tender; because it has no intrinsic value, it is backed by the public's trust that the government maintains its value
Excess Reserves
Reserves held by a bank in above what is required of them by the Fed (the difference between actual reserves and required reserves)
Asset Demand
The amount of money demanded as an asset is negatively related to the real interest rate; as nominal interest rates rise, the opportunity cost of holding money begins to rise and you are more likely to lessen your asset demand for money
Transaction Demand
The amount of money held in order to make transactions; this is not related to the interest rate, but increases as nominal gross domestic product (GDP) increases
Future Value
The amount of money in the future that an amount of money today will yield, given prevailing interest rates
Money Multiplier
The amount of money the banking system generates with each dollar of reserves (1 / reserve ratio)
Present Value
The amount of money today that would be needed, using prevailing interest rates, to produce a given future amount of money
Required Reserves
The amount of reserves that bank must hold in cash in their vaults or in their account at the Federal Reserve (it is equal to demand deposits x reserve requirement)
Federal Reserve
The central bank of the U.S.
Reserve Ration
The fraction of deposits that banks hold as reserves
Discount Rate
The interest rate commercial banks pay on short-term loans from the Fed
Federal Funds Rate
The interest rate paid on short-term loans made from one bank to another; when this rate is a target for open market operations, bonds are bought and sold accordingly until the interest rate target has been met
M1
The most liquid measure of money definitions and the basis for all other more broadly defined measures of money; = cash + coins + checking deposits + traveler's checks
Money Demand
The negative relationship between nominal interest rate and the quantity of money demanded as an asset plus the quantity of money demanded for transactions
Currency
The paper bills and coins in the hands of the public
Interest Rate
The price, calculated as a percentage of the amount borrowed, charged by the lender
Open-Market Operation
The purchase and sale of U.S. government bonds by the Fed
Open-Market Purchase
The purchase of U.S. government bonds by the Fed (used to increase the money supply and drive down nominal interest rates)
Money Supply
The quantity of money available in the economy
Bank Capital
The resources a bank's owners have to put into the financial institution they own (used to reduce the likelihood that banks will have to be bailed out by the government in order to meet demands of their depositors)
Open-Market Sale
The sale of U.S. government bonds by the Fed (used to decrease the money supply and drive up nominal interest rates)
Money
The set of assets in an economy that people regularly use to buy goods and services from other people
Monetary Policy
The setting of money supply by policymakers in the central bank
Monetary Base
The sum of currency in circulation and bank reserves
Unit of Account
The yardstick people use to post prices and record debts
Functions of Money
Three functions: a medium of exchange, a unit of account, and a store of value