Econ Chapter 9
Quantity theory of money
A theory of the connection between money and prices that assumes that the velocity of money is constant. Those factors influencing velocity are not subject to great swings, unlike the money supply which can be changed significantly
Reserves
Deposits that a bank keeps as cash in its vault or on deposit with the Federal Reserve
M2
M1 plus savings account balances, small-denomination time deposits, balances in money market deposit accounts in banks, and non institutional money market fund shares
Fractional Reserve Banking system
a banking system in which banks keep less than 100% of deposits as reserves
Commodity money
a good used as money that also has vlaue independent of its use as money
Bank Panic
a situation in which many banks experience runs at the same time
Bank Run
a situation in which many depositors simultaneously decide to withdraw money from a bank
Asset
anything of value owned by a person or a firm
Money
assets that people are generally willing to accept in exchange for goods and services or for payment of debts
Open Market Operations
buying and selling of Treasury securities by the federal reserve in order to control the money supply
Unit of Account
in a barter system, each good has many prices
Bond
is a legal promise to repay a debt
Fiat Money
it can be inefficient for an economy to rely on only gold or other precious metals for its money supply
discount loans
loans the federal reserves makes to banks
The Functions of Money
medium of exchange, unit of account, store of value, standard of deferred payment
Commodity Money
meets the criteria for a medium of exchange
Store of Value
money allows value to be store easily: If you do not use all you accumulated dollars to buy goods and services today, you can hold the rest to use in the future
Standard of Deferred Payment
money is useful because it can serve as a standard of deferred payment in borrowing and lending
Medium of Exchange
money serves as a medium of exchange when sellers are willing to accept it in exchange for goods or services
Fiat Money
money, such as paper currency, that is authorized by a central bank or government body and that does not have to be exchanged by the central bank for gold or some other commodity money
Required Reserves
reserves that a bank is legally required to hold, based on its checking account deposits
Excess Reserves
reserves that banks hold over and above the legal requirement
Monetary policy
the actions the federal reserve takes to manage the money supply and interest rate to pursue economic objectives
Velocity of money
the average number of times each dollar in the money supply is used to purchase goods and services in GDP
Federal Reserve System
the central bank of the US
Federal Open Market Committee
the federal reserve committee responsible for open market operations and managing the money supply in the US
Discount Rate
the interest rate the federal reserve charges on discount loans
Required Reserve Ratio
the minimum fraction of deposits banks are required by law to keep as reserves
Simple Deposit Multipler
the ratio of the amount of deposits created by banks to the amount of the new reserves
M1
the sum of currency in circulation, checking account deposits in banks, and holding of traveler's checks
