Econ Chapter 9

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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


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