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