chapter 14

Question 1

asset

Answer 1

item of value that a firm or an individual owns

Question 2

asset–liability time mismatch

Answer 2

customers can withdraw a bank’s liabilities in the short term while customers repay its assets in the long term

Question 3

balance sheet

Answer 3

an accounting tool that lists assets and liabilities

Question 4

bank capital

Answer 4

a bank’s net worth

Question 5

barter

Answer 5

literally, trading one good or service for another, without using money

Question 6

coins and currency in circulation

Answer 6

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

Question 7

commodity money

Answer 7

an item that is used as money, but which also has value from its use as something other than money

Question 8

commodity-backed currencies

Answer 8

dollar bills or other currencies with values backed up by gold or another commodity

Question 9

credit card

Answer 9

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

Question 10

debit card

Answer 10

like a check, is an instruction to the user’s bank to transfer money directly and immediately from your bank account to the seller

Question 11

demand deposit

Answer 11

checkable deposit in banks that is available by making a cash withdrawal or writing a check

Question 12

depository institution

Answer 12

institution that accepts money deposits and then uses these to make loans

Question 13

diversify

Answer 13

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

Question 14

double coincidence of wants

Answer 14

a situation in which two people each want some good or service that the other person can provide

Question 15

flat money

Answer 15

has no intrinsic value, but is declared by a government to be the country’s legal tender

Question 16

financial intermediary

Answer 16

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

Question 17

liability

Answer 17

any amount or debt that a firm or an individual owes

Question 18

M1 money supply

Answer 18

a narrow definition of the money supply that includes currency and checking accounts in banks, and to a lesser degree, traveler’s checks.

Question 19

M2 money supply

Answer 19

a definition of the money supply that includes everything in M1, but also adds savings deposits, money market funds, and certificates of deposit

Question 20

medium of exchange

Answer 20

whatever is widely accepted as a method of payment

Question 21

money

Answer 21

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.

Question 22

money market fund

Answer 22

the deposits of many investors are pooled together and invested in a safe way like short-term government bonds

Question 23

money multiplier formula

Answer 23

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

Question 24

net worth

Answer 24

the excess of the asset value over and above the amount of the liability; total assets minus total liabilities

Question 25

payment system

Answer 25

helps an economy exchange goods and services for money or other financial assets

Question 26

reserves

Answer 26

funds that a bank keeps on hand and that it does not loan out or invest in bonds

Question 27

savings deposit

Answer 27

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

Question 28

smart card

Answer 28

stores a certain value of money on a card and then one can use the card to make purchases

Question 29

standard of deferred payment

Answer 29

money must also be acceptable to make purchases today that will be paid in the future

Question 30

store of value

Answer 30

something that serves as a way of preserving economic value that one can spend or consume in the future

Question 31

T-account

Answer 31

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”

Question 32

time deposit

Answer 32

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

Question 33

transaction costs

Answer 33

the costs associated with finding a lender or a borrower for money

Question 34

unit of account

Answer 34

the common way in which we measure market values in an economy