Chapter 13: Money and Banks Flashcards
(28 cards)
What is the definition of money?
Anything generally accepted as a medium of exchange.
What are the three main uses of money?
Medium of exchange, store of value, and standard of value.
What is barter?
The direct exchange of one good for another without money.
What forms has money taken throughout history?
Gold, tobacco, fish, bullets, cigarettes, greenbacks, etc.
What determines if something is money?
Its ability to purchase goods and services.
What is the money supply (M1)?
Currency held by the public plus balances in transaction accounts.
What are transaction accounts?
Bank accounts (e.g., checking) that permit direct payment to third parties.
What is near money?
Time deposits and money market mutual funds — included in M2.
What is M2?
M1 plus near-money assets like savings deposits and money market funds.
How does money affect aggregate demand?
More money increases spending, which raises aggregate demand.
What is deposit creation?
The process by which banks make loans and create money.
How do banks create money?
By making loans from customer deposits.
What happens to the money supply when a bank loans money?
The money supply increases.
What are required reserves?
The minimum reserves a bank must hold, set by regulation.
How are required reserves calculated?
Required reserves = reserve ratio × total deposits.
What are excess reserves?
Bank reserves above the required minimum.
Why are excess reserves important?
They determine how much a bank can lend.
What happens when a bank makes a loan with excess reserves?
It increases the money supply.
In a monopoly bank scenario, what is the reserve ratio if $100 in deposits allows $100 in loans?
50% reserve ratio.
What is the money multiplier?
The number of dollars the banking system can create from $1 of excess reserves.
How is the money multiplier calculated?
1 ÷ reserve ratio.
If the reserve ratio is 75%, what is the money multiplier?
1 ÷ 0.75 = 1.33.
How does the money multiplier process work?
Loans become deposits at other banks, which then lend part of those deposits.
What limits the potential of the money multiplier?
The amount of excess reserves and the reserve requirement.
