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Flashcards in Chapter 25 Deck (24):
1

Barter

Literally, trading one good or service for another. A very weak mechanism for trying to coordinate exchanges in a modern advanced economy.

2

double coincidence of wants

A situation in which two people each want some good or service that the other person is able to provide.

3

Medium of exchange

Money must be very widely accepted as a method of payment in the markets for goods, labor, and financial capital. U.S. paper money, for example, carries the statement: “THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE.” In other words, if you owe a debt, then you may legally pay that debt with currency.

4

Unit of account

Money is the ruler by which other values are measured.

5

Store of value

Refers to the situation whereby each marginal unit of a consumed good provides less of an addition to utility than the previous unit.

6

Money

Needs to serve the functions of being a medium of exchange, unit of account, and store of value.

7

Commodity money

Has an alternative value or use, such as with coins, which are made from precious metals like gold and silver. However, the value of commodity money fluctuates widely as its base commodity’s market value changes. Gold coins, for example, have a face value, but their real value is based on that of the gold within them. If gold prices increase, their value increases. As gold prices fall, so does the value of the coin.

8

Fiat money

Has value only because people have put faith in the money and accept that it has value. For example, U.S. paper currency like the $20 bill—more officially known as a Federal Reserve Note—has value only because people accept that it does. Since fiat money usually serves the three functions of money, modern governments today issue fiat currency.

9

liquidity

Refers to the availability of cash (or assets that can be quickly converted to cash) to meet obligations.

10

Currency

The coins and bills that circulate in an economy. Component of M1. One of the most liquid classification of money.

11

Traveler’s checks

Component of M1. Purchased from a bank or financial company, signed, and then redeemed with an additional signature when one wants to spend them.
Traveler’s checks have the advantage of being accepted almost as widely as currency. In addition, if they are ever lost or stolen the company that issued them will replace them—cash offers no such protection.Component of M1. Purchased from a bank or financial company, signed, and then redeemed with an additional signature when one wants to spend them.
Traveler’s checks have the advantage of being accepted almost as widely as currency. In addition, if they are ever lost or stolen the company that issued them will replace them—cash offers no such protection.

12

Demand deposits

Personal checks, which are deposits in banks that are available upon making a cash withdrawal or writing a check. Component of M1.

13

M2

Relatively liquid classification of money. Some components of M2 cannot be spent as easily as the components of M1. M2 includes everything in the
category of M1, plus savings accounts, money market funds, and small time deposits (certificates of deposit).Relatively liquid classification of money. Some components of M2 cannot be spent as easily as the components of M1. M2 includes everything in the
category of M1, plus savings accounts, money market funds, and small time deposits (certificates of deposit).

14

Savings accounts

Bank accounts on which you can’t write a check directly but from which you can easily withdraw money at an automatic teller machine or bank. They are a
component of M2.Bank accounts on which you can’t write a check directly but from which you can easily withdraw money at an automatic teller machine or bank. They are a
component of M2.

15

Money market funds

Government spending

16

Small time deposits (certificates of deposit)

Component of M2. Relatively small (that is, less than about $100,000) certificates of deposit or time deposits, which are accounts that the depositor has committed to leaving in the bank for a certain period of time—ranging from a few months to a few years—in exchange for a higher interest rate.

17

balance sheet

Accounting tool that lists assets and liabilities.

18

Loans

Bank assets that a borrower will repay over a period of time. The borrower has a legal obligation to make payments to the bank over time.

19

Securities

Any kind of financial asset that can be bought and sold.

20

Reserves

Money that the bank keeps on hand, not loaned out or invested in securities—and that therefore might not lead to interest income for the bank. Government
regulators typically set minimum reserve levels to which banks must adhere.

21

excess reserves

Any reserves that the bank holds beyond either its required reserve or any additional reserves for daily use by bank customers.

22

net worth

In relation to a bank, its total assets minus its total liabilities. Also known as owners’ equity. A financially healthy bank has a positive net worth.

23

insolvent

Bankrupt.

24

reserve ratio

Represents the proportion of deposits that a bank wishes to hold in reserves.