Economics A175 Chapter Notes - Chapter 16: Reserve Requirement, Open Market Operation, Money Supply
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.