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.