Economics A175 Chapter Notes - Chapter 16: Reserve Requirement, Open Market Operation, Money Supply
15 May 2020
School
Department
Course
Professor
Economics A175
Manuel Kellogg
Monetary System
The social custom of using money for transactions is useful in a large complex society. The
existence of money makes trade easier and the other person does not care whether you can produce
a value that is equal. The term money is used to mean wealth.
Terms to know
1. Money ā the set of assets in an economy that people regularly use to buy goods and
services from other people
2. Medium of exchange ā an item that buyers give to sellers then they purchase goods and
services
3. Unit of account ā the yardstick people use to post prices and record debts
4. Store of value ā an item that people can use to transfer purchasing power from the present
to the future
5. Liquidity ā ease with which an asset can be converted into the economyās medium of
exchange
6. Commodity money ā money that takes the form of a commodity with intrinsic values
7. Fiat money ā money w/o intrinsic values
8. Currency ā the paper bills and coins in the hands of the public
9. Demand deposits ā balances in bank accounts that depositors can access on demand by
writing a check
10. Federal reserve ā fed , the central bank of US
11. Central bank ā the institution designed to oversee the banking system and regulate the
quantity of money in the economy
12. Money supply ā the quantity of money available in the economy
13. Monetary policy ā the setting of money supply by policymakers in the central bank
14. Reserves ā deposits that banks have received but have not loaned out
15. Fractional-reserve banking ā a banking system in which banks hold only a fraction of
deposits as reserves
16. Reserve ratio ā the fraction of deposits that banks hold as reserves
17. Money multiplier ā the amt of money the banking system generates with each dollar of
reserves
18. Bank capital ā the resources a bankās owners have put into the institution
19. Leverage ā use of borrowed money to supplement existing funds for purposes of
investment
20. Leverage ratio ā the ratio of assets to bank capital
21. Capital requirement ā government regulation specifying a min amount of bank capital
22. Open market operations ā the purchase and sale of US government bonds by the fed
23. Discount rate ā the interest rate on the loans that the fed makes to banks
24. Reserve requirement ā regulations on the min amt of reserves that banks must hold
against deposits
Document Summary
The social custom of using money for transactions is useful in a large complex society. The existence of money makes trade easier and the other person does not care whether you can produce a value that is equal. The term money is used to mean wealth. The term money refers to assets that people regularly use to buy goods and services. As a medium of exchange, it is the item used to make transactions. As a unit of account, it provides the way in which prices and other economic values are recorded. As a store of value, it offers a way to transfer purchasing power from the present to the future. Commodity money, such as gold, is money that has intrinsic value: It would be valued even if it were not used as money. Fiat money, such as paper dollars, is money without intrinsic value: It would be worthless if it were not used as money.
