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Anything that serves as a medium of exchange
What is a medium of exchange?
Anything that is widely accepted as a means of payment
What does it mean to barter
when goods are exchanged directly for other goods (trades)
Define unit of account
A consistent means of measuring the value of things.
What ia a store of value?
An item that holds value over time
When you find a 20 dollar bill a year after you lose it, it still has value to it.
Define commodity money
Money that has value apart from its use as money
Most popular examples are gold and silver.
What is fiat money
Money that some authority like a government, has ordered to be accepted as a medium of exchange. Has no other value to it other than money.
Define money supply
the total amount of money in the economy at any one time
What is liquidity
the ease with which an asset can be converted into currency
What is the difference between m1 and m2?
- M1 - the narrowest of the Fed's money supply definitions that incudes currency in circulation, checkable deposits, and traveler's checks.
- M2- A broader measure of the money supply that includes M1 and other deposits.
What are financial intermediaries?
An institution that amasses funds from one group and makes them available to another.
An institution that collects funds from lenders and distributes these funds to borrowers
Ex. Insurance Companies and banks
What are banks
A financial intermediary that accepts deposits, makes loans, and offers checking accounts
What are balance sheets?
Financial statements that show assets, liabilities, and net worth
Equation of net worth?
Assets minus liabilities
What are reserves?
Bank assets held as cash in vaults and in deposits with the Federal Reserve
Define Fractional reserves
Banks hold only a fraction of their deposits in reserves (in their vaults or in deposits at the Federal reserve). The bulk of their deposits/liabilities are lent out. Above, held only 10% of deposits as required reserves
Credit Cards are considered money? true or false
Benefits of monetary economy?
an economy using money allows specialization and division of labor, the development of a financial system to channel savings to investment, and increases economic efficiency, output, income and wealth
are all banks liquid or illiquid?
What does it mean for a bank to be insolvent?
Assets are less than liabilities.
Define Demand for Money
The relationship between the quantity of money people want to hold and the factors that determine that quantity.
Define Transaction Demand for money
Money people hold to pay for goods and services they anticipate buying.
Define Precautionary Demand for Money
Money people hold for contingencies, or future events
Define Speculative Demand for Money
The money held in response tro concern that bond prices and the prices of other financial assets might change
Define Demand Curve for Money
Curve that shows the quantity of money demanded at each interest rate, all other things unchanged
Define Supply Curve of Money
Curve that shows the relationship between the amount of money supplied and the market interest rate, all other things unchanged
Demand and Supply of MONEY determines short-term interest rates. True of false
What are federal funds
rate at which banks make loans to one another
Treasury bill rate
yield on short-term U.S. government bonds – determined by supply and demand for these bonds
benchmark rate set by banks for ‘best’ customers, other rates linked to this
What is the relationship between bond prices and interest rates?
the are inverses of each other.
when interest rates go up, bond prices go down.
What is Gresham's Law
bad money chases out good money
*****What is the role of the financial system?
To transfer resources from savers to borrowers
CFPB - consumer financial protection bureau
Who accomplished separating commercial and investment banking?
What are the three functions of money?
- Store of Value
- Unit of Account
- Medium of Exchange
use of borrowed funds to magnify returns
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