Unit 8 Flashcards
(25 cards)
What is money
any asset that can easily be used to purchase goods and services
What is currency in circulation
cash held by the public
What is checkable bank deposits
bank accounts on which people can write checks
What is money supply
the total value of financial assets in the economy that are considered money
What is fiat money
money whose value derives entirely from its official status as a means of payment
What is commodity backed money
a medium of exchange with no intrinsic value whose ultimate value is guaranteed by a promise that it can be converted into valuable goods
What is monetary aggregate
an overall measure of the money supply
What is M1
This includes only money in its most liquid form
What is M2
includes near-money, financial assets that can’t be directly used as a medium of exchange but can be readily converted into cash or checkable bank deposits
What is the function of money
A median of exchange
A store of value
A unit of account
What are banks
financial intermediaries that use liquid assets (bank deposits) to finance illiquid investment of borrowers
What is a t-account
a tool for analysing a business’s financial position by showing the business’s assets and liabilities
What are the properties of a t-account
along the top you have assets and liabilities
Under assets you have loans and reserves
under liabilities you have deposits
What is a bank reserve
the currency that the bank holds in their vaults plus their deposits at the federal reserve
What is the reserve ratio
The fraction of bank deposits that a bank holds as reserves
What is excess reserves
This is when a banks reserve is over the required reserve amount
we assume that banks don’t want to hold excess reserve so will loan out the excess
How do banks create money
You deposit a sum of money at the bank
They are required to keep a portion of it in reserves
They then loan out the remainder and make money on interest and fees
How does the FED increase money supply
The Fed injects reserves into the system
How does the FED decease money supply
The FED must remove reserves from the system
What is the discount rate
The rate of interest that the FED charges to loan to banks
When the FED buys t-bills what happens
The FED has to pay for the t-bills
The fed elecronically increases reserves of the seller
with more reserves the bank lends out more loans
money supply increases as there is money creation
What happens when the FED sells t-bills
the FED sells t-bills, this reduces the reserves of the buyer
with fewer reserves the bank lends out less loans
Money supply decreases as there is reduced money creation
What is the federal funds market
This allows banks that fall short of the reserve requirement to borrow funds from banks with excess
reserves.
What happens when the FED buys anything
The reserve increases
