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any medium that is universally accepted in an economy both by sellers of goods and services as payment for those goods and services and by creditors as payment for debts
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terms list

any medium that is universally accepted in an economy both by sellers of goods and services as payment for those goods and services and by creditors as payment for debts
medium of exchange, unit of accounting, store of value, standard of deferred payment
four functions of money
medium of exchange
anything that sellers will accept as payment
the direct exchange of goods and services for other goods and services without the use of money
transaction costs
money facilitates exchange by reducing the ____ ____ associated with means-of-payment uncertainty
the use of money as a unit of medium of exchange permits more ____ and its inherent economic efficiencies
unit of accounting
a measure by which prices are expressed; the common denominator of the price system; a central property of money
store of value
the ability to hold value over time; a necessary property of money
standard of deferred payment
a property of an item that makes it desirable for use as a means of settling debts maturing in the future; an essential property of money
the degree to which an asset can be acquired or disposed of without much danger of any intervening loss in nominal value and with small transaction costs
the most liquid asset
[true/false] the cost of holding money (it's opportunity cost), is measured by the alternative interest yield obtainable by holding some other asset
commodity money
money that holds value for other uses that it provides besides those just as a medium of exchange (ex: corn, cows, salt)
transactions deposits
any accounts in financial institutions from which you can easily transmit debit-card and check payments without many restrictions
fiduciary monetary system
a system in which money is issued by the government and its value is based uniquely on the public's faith that the currency represents command over goods and services
the purchasing power of the dollar (its real value) varies [inversely/directly] with the price level
money supply
the amount of money in circulation
transactions, liquidity
two standard approaches to the definition of money
transactions approach
a method of measuring the money supply by looking at money as a medium of exchange
liquidity approach
a method of measuring the money supply by looking at money as a temporary store of value
the money supply, taken as the total value of currency plus transactions deposits plus traveler's checks not issued by banks
thrift institutions
financial institutions that receive most of their funds from the savings of the public; they include savings banks, savings and loan associations, and credit unions
traveler's checks
financial instruments obtained from a bank or a non-banking organization and signed during purchase that can be used as cash upon a second signature by the purchaser
near moneys
assets that have a high degree of liquidity and thus can be easily converted into money without a loss in value, for example, time deposits
the money supply taken as the total value of currency, transactions deposits and traveler's checks, plus savings and small-denomination time deposits, balances in retail money market mutual funds, and money market deposit accounts
savings deposits
interest-earning funds that can be withdrawn at any time without payment of a penalty
depository institutions
financial institutions that accept deposits from savers and lend out funds from those deposits at interest
(money market deposit account) MMDA
an account issued by banks yielding a market rate of interest with a minimum balance requirement and a limit on transactions. Has no minimum maturity
time deposit
a deposit in a financial institution that requires notice of intent to withdraw or must be left for an agreed period. Withdrawal of funds prior to the end of the agreed period may result in a penalty
certificate of deposit (CD)
a time deposit with a fixed maturity date offered by banks and other financial institutions
to be included in the M2 definition of of the money supply, time deposits must be less than this much
money market mutual funds
funds obtained from the public that investment companies hold in common and use to acquire short-maturity credit instruments, such as certificates of deposit and securities sold by the US government
central bank
a banker's bank, usually an official institution that also serves as a country's treasury bank. Normally regulates commercial banks
direct financing
when people lend funds directly to businesses
indirect financing
when people deposit money into a bank that is then lent to a company
financial intermediation
the process by which financial institutions accept savings from businesses, households, and governments and lend the savings to other businesses, households and governments
financial intermediaries
institutions that transfer funds between ultimate lenders (savers) and ultimate borrowers
asymmetric information
information possessed by one party in a financial transaction but not by the other party
adverse selection
the likelihood that individuals who seek to borrow may use the funds that they receive for high-risk projects
moral hazard
the possibility that a borrower might engage in riskier behavior after a loan has been obtained
pension fund companies
companies that specialize in managing funds that individuals save for retirement
investment companies
institutions that manage portfolios of mutual funds on behalf of shareholders
amounts owed; the legal claims against a business or household by nonowners
amounts owned; all items to which a business or household holds legal claim
payment intermediaries
institutions that facilitate transfers of funds between depositors who hold transactions deposits with those institutions
capital controls
legal restrictions on the ability of a nation's residents to hold and trade assets denominated in foreign currencies
international financial diversification
financing investment projects in more that one country
world index fund
a portfolio of bonds issued in various nations whose individual yields generally move in offsetting directions, thereby reducing the overall risk of losses (conditions in one country worsen at about the same rate that conditions in another country improve)
universal banking
an environment in which banks face few or no restrictions on their powers to offer a full range of financial services and to own shares of stock in corporations
the federal reserve system (the fed)
the central bank of the united states
lender of last resort
the federal reserve's role as an institution that is willing and able to lend to a temporarily illiquid bank that is otherwide in good financial condition to prevent the bank's illiquid position from leading to a general loss of confidence in that bank or in others
fractional reserve banking
a system in which depository institutions hold reserves that are less than the amount of total deposits. First type of banking system ever used
deposits held by Federal Reserve District banks for depository institutions, plus depository institutions' vault cash
legal, required, excess
three types of reserves
legal reserves
reserves that depository institutions are allowed by law to claim as reserves--for example, deposits held at Federal Reserve district banks and vault cash. Also known as total reserves
required reserves
the minimum amount of legal reserves that a depository institution must have to back transactions deposits
required reserve ratio
the percentage of total transactions that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
excess reserves
the difference between legal reserves and required reserves
balance sheet
a statement of the assets and liabilities of any business entity, including financial institutions and the Federal Reserve System
open market operations
the purchase and sale of existing US government securities (such as bonds) in the open private market by the Federal Reserve System
money multiplier
a number that, when multiplied by a change in reserves in the baking system, yields the resulting change in the money supply
potential money multiplier
the reciprocal of the required reserve ratio, assuming no leakages into currency and no excess reserves. It is equal to one divided by the required reserve ratio
currency drains and excess reserves
two factors that contribute to the real-world reduction of the money multiplier
currency drain
money held in the wallets of individuals that cannot be accounted for by the banking system, and is thus considered leakage
[true/false] the purchase of a US government security by the Fed results in an increase in reserves and leads to a multiple-expansion in the money supply
discount rate
the interest rate that the federal reserve charges for reserves that it lends to depository institutions. It is sometimes referred to as the rediscount rate or the bank rate
federal funds market
a private market (made up mostly of banks) in which banks can borrow reserves from other banks that want to lend them. They are usually lent for overnight use.
federal funds rate
the interest rate that depository institutions pay to borrow reserves in the interbank federal funds market
sweep account
a depository institution account that entails regular shifts of funds from transactions deposits that are subject to reserve requirements to savings deposits that are exempt from reserve requirements
FDIC (Federal Deposit Insurance Corporation)
A government agency that insures the deposits held in banks and most other depository institutions; all US banks are insured this way
bank run
an attempt made by many of a bank's depositors to convert transactions and time deposits into currency out of fear that the bank's liabilities may exceed its assets
money balances
synonymous with money, money stock and money holdings
transactions demand
demand for money as a medium of exchange to make payments. The level varies directly with nominal GDP
precautionary demand
demand for money to meet unplanned expenditures and emergencies
lower (because they want to invest as much as possible to earn interest)
the higher the rate of interest, the [higher/lower] the amount people wish to hold for precautionary demand
asset demand
the demand for money as a store of value instead of other assets such as certificates of deposit, corporate bonds or stocks
its liquidity and lack of risk
people choose to hold money as a store of value (as opposed to bonds, stocks or certificates of deposit) for these two reasons
interest earnings forgone
the disadvantage to holding money as an asset
the demand for money curve, which plots the quantity of money held as an asset against the interest rate, is [positive/negative]
inversely (the higher the rate of interest on new bonds, the lower the demand for existing bonds that have a lower rate of interest)
the market price of existing* bonds is [directly/inversely] related to the interest rate prevailing in the economy
federal funds rate
when a bank wishes to lend out more money than it has on reserve, it borrows from another bank and is charged the [federal funds rate/discount rate]
discount rate
when a bank dips into its reserve requirements and finds that it has insufficient funds to cover its loans, it borrows from the fed at the [federal funds rate/discount rate]
decrease, more, less
an appreciation of the dollar (its value increasing) tends to [increase/decrease] the number of net exports because it makes our exports [more/less] expensive in terms of foreign currency and imports [more/less] expensive in therms of the dollar
contractionary monetary policy causes interest rates to go [up/down]
a rise in interest rates will cause a(n) [increase/decrease] in international inflows of financial capital (money that can be spent on investments)
an increase in the international value of the dollar makes US goods [more/less] attractive to people in foreign countries
lowers, decreases, falls, more, falls, rises
in expansionary policy, the fed [raises/lowers] interest rates, the demand for the dollar [increase/decreases], the price of the dollar [rises/falls], foreign goods will become [more/less] expensive to US residents so the number of imports [rises/falls], and the number of exports [rises/falls]
the equation of exchange
the equation of exchange
the formula indicating that the number of monetary units times the number of times each unit is spent on final goods and services is identical to the price level times the real GDP
nominal GDP
actual money balances times income velocity OR the price level times the real GDP per year are both also equal to this
income velocity of money
the average number of times a dollar is spent on final goods and services per year
the quantity theory of money and prices
the theory that says that changes in the money supply lead to proportional changes in the price level
an increase in the money supply ultimately [increases/decreases] the interest rate
FOMC directive
a document that summarizes the Federal Open Market Committee's general policy strategy, establishes near-term objectives for the federal funds rate, and specifies target ranges for money supply growth
Trading desk
an office at the Federal Reserve Bank of New York charged with implementing monetary policy strategies developed by the Federal Open Market Commitee
Taylor rule
a suggested guideline for monetary policy, in the form of an equation determining the Fed;s interest rate target based on an estimated long-run real interest rate, the present dviation of the actual inflation rate form the Fed's inflation objective, and the gap between actual real GDP and a measure of potential GDP
beyond the fact that comparative advantage results in an overall increase in the output of goods produced and consumed, international trade bestows benefits on countries through the transmission of these
in the long run, imports are paid for by these
any restriction of these ultimately reduces exports
infant industry argument
the argument that tariffs should be imposed to protect from import competition an industry that is trying to get started. Presumably, after the industry becomes technologically efficient, that tariff can be lifted
selling a good or service abroad below the price charged in the home market or at a price below its cost of production
imports and employment are [positively/negatively] correlated
broad trade restrictions mainly [help/harm] those nations that impose them
quota system
a government-imposed restriction on the quantity of a specific good that another country is allowed to sell in the United States. In other words, they are restrictions on imports
voluntary restraint agreement
an official agreement with another country that voluntarily restricts the quantity of its exports to the United States
voluntary import expansion
an official agreement with another country to import more US goods
GATT (General Agreements on Tariffs and Trade)
an international agreement established in 1947 to further wold trade by reducing barriers and tariffs. It was replaced by the WTO in 1995
WTO (World Trade Organization)
the successor organization to GATT that handles trade disputes among its member nations
regional trade blocs
a group of nations that grants members special trade privileges
balance of trade
the difference between exports and imports of physical goods
when the value of exports exceeds the value of imports, we are running a [surplus/deficit]
balance of payments
a system of accounts that measures transactions of goods, services, income, and financial assets between domestic households, businesses and governments and residents of the rest of the world during a specific time period
deficit, negative
any transaction that leads to a payment by a country's residents or government is a [surplus/deficit] item and is identified by a [positive/negative] sign
accounting identities
values that are identical by definition
current account
a category of balance of payments transactions that measures the exchange of merchandise, the exchange of services, and unilateral transfers
current account surplus
if the sum of net exports of goods and services plus net unilateral transfers plus net investment income exceeds zero, one of these is said to exist
current account deficit
this means that we import more goods than we export, and must pay for it through the export of money
capital account
a category of balance of payments transactions that measures flows of real and financial assets
capital account surplus
a current account deficit must equal this when governments and central banks do not engage in foreign trade
current account deficit
any nation experiencing this must also be running a capital account surplus

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