Chapter 4 Flashcards
Three Functions of Money
1.) Medium of Exchange
2.) Store of Value (Value is not volatile)
3.)Unit of Account (Measures Value)
Commodity Money
objects that have value in themselves as well as value in their use as money. Gold, for example
Fiat Money
legal tender whose value is backed by the government that issued it.
Virtual Currency
a digital representation of value that is neither issued by a central bank nor a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored, or traded electronically.”
Role of Banks
Intermediary between savers and borrowers
Facilitate Payment system
Ensure Money Multiplier Effect.
The Federal Reserve
Conducts monetary policy
Promotes stability of the financial system
Provide banking services to commercial banks and the federal government
Monetary Policy Role of the Federal Reserve
1.) Open Market Operations (Buy/Sell treasury bonds)
2.)Change Reserve Requirements
3.)Change the discount rate (interest rate banks pay on loans from the fed
M1 Money Supply
Monies that are very liquid
E.x: Cash & Checking Accounts
M2 Money Supply
Less Liquid: M1 Monies + Savings Accounts, Money Market Funds, Certificates of Deposit
How Businesses Raise Early Capital
1.)Early-Stage Capital (Owners/ Angel/Venture Capital investments)
2.)Bonds (Take out debt with an interest rate, but save ownership/equity of company)
3.)Corporate Stock (Offer equity of company in exchange for funds)
4.) Reinvest profits (Don’t take a paycheck, invest revenue)
Private Company V.S. Public Company
Private: Company that is owned by the people that run it day-to-day
E.x: Sole-prop, Partner, Corporation (no public stock)
Public: A corporation that sells its stock publicly. Shareholders own the company and vote for the board of directors who run the company
