Chapter 25 - The Money Supply and the Federal Reserve System Flashcards Preview

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Flashcards in Chapter 25 - The Money Supply and the Federal Reserve System Deck (25):


The direct exchange of goods and services for other goods and services.


medium of exchange, or means of payment

What sellers generally accept and buyers generally use to pay for goods and services.


store of value

An asset that can be used to transport purchasing power from one time period to another.


liquidity property of money

The property of money that makes it a good medium of exchange as well as a store of value: It is portable and readily accepted and thus easily exchanged for goods.


unit of account

A standard unit that provides a consistent way of quoting prices.


commodity monies

Items used as money that also have intrinsic value in some other use.


fiat, or token, money

Items designated as money that are intrinsically worthless.


legal tender

Money that a government has required to be accepted in settlement of debts.


currency debasement

The decrease in the value of money that occurs when its supply is increased rapidly.


M1, or transactions money

Money that can be directly used for transactions.


near monies

Close substitutes for transactions money, such as savings accounts and money market accounts.


M2, or broad money

M1 plus savings accounts, money market accounts, and other near monies.


financial intermediaries

Banks and other institutions that act as a link between those who have money to lend and those who want to borrow money.


run on a bank

Occurs when many of those who have claims on a bank (deposits) present them at the same time.


Federal Reserve Bank (the Fed)

The central bank of the United States.



The deposits that a bank has at the Federal Reserve bank plus its cash on hand.


required reserve ratio

The percentage of its total deposits that a bank must keep as reserves at the Federal Reserve.


excess reserves

The difference between a bank’s actual reserves and its required reserves.


money multiplier

The multiple by which deposits can increase for every dollar increase in reserves; equal to 1 divided by the required reserve ratio.


Federal Open Market Committee (FOMC)

A group composed of the seven members of the Fed’s Board of Governors, the president of the New York Federal Reserve Bank, and four of the other
11 district bank presidents on a rotating basis; it sets goals concerning the money supply and interest rates and directs the operation of the Open Market Desk in New York.


Open Market Desk

The office in the New York Federal Reserve Bank from which government securities are bought and sold by the Fed.


lender of last resort

One of the functions of the Fed: It provides funds to troubled banks that cannot find any other sources of funds.


discount rate

The interest rate that banks pay to the Fed to borrow from it.


moral suasion

The pressure that in the past the Fed exerted
on member banks to discourage them from borrowing heavily from the Fed.


open market operations

The purchase and sale by the Fed of government securities in the open market; a tool used to expand or contract the amount of reserves in the system and thus the money supply.