236 Glossary: Monetary Policy
Money and Banking
- asset
- item of value owned by a firm or an individual
- asset–liability time mismatch
- a bank’s liabilities can be withdrawn in the short term while its assets are repaid in the long term
- balance sheet
- an accounting tool that lists assets and liabilities
- bank capital
- a bank’s net worth
- barter
- literally, trading one good or service for another, without using money
- coins and currency in circulation
- the coins and bills that circulate in an economy that are not held by the U.S Treasury, at the Federal Reserve Bank, or in bank vaults
- commodity money
- an item that is used as money, but which also has value from its use as something other than money
- commodity-backed currencies
- are dollar bills or other currencies with values backed up by gold or another commodity
- credit card
- immediately transfers money from the credit card company’s checking account to the seller, and at the end of the month the user owes the money to the credit card company; a credit card is a short-term loan
- debit card
- like a check, is an instruction to the user’s bank to transfer money directly and immediately from your bank account to the seller
- demand deposit
- checkable deposit in banks that is available by making a cash withdrawal or writing a check
- depository institution
- institution that accepts money deposits and then uses these to make loans
- diversify
- making loans or investments with a variety of firms, to reduce the risk of being adversely affected by events at one or a few firms
- double coincidence of wants
- a situation in which two people each want some good or service that the other person can provide
- fiat money
- has no intrinsic value, but is declared by a government to be the legal tender of a country
- financial intermediary
- an institution that operates between a saver with financial assets to invest and an entity who will borrow those assets and pay a rate of return
- liability
- any amount or debt owed by a firm or an individual
- M1 money supply
- a narrow definition of the money supply that includes currency and checking accounts in banks, and to a lesser degree, traveler’s checks.
- M2 money supply
- a definition of the money supply that includes everything in M1, but also adds savings deposits, money market funds, and certificates of deposit
- medium of exchange
- whatever is widely accepted as a method of payment
- money market fund
- the deposits of many investors are pooled together and invested in a safe way like short-term government bonds
- money multiplier formula
- total money in the economy divided by the original quantity of money, or change in the total money in the economy divided by a change in the original quantity of money
- money
- whatever serves society in four functions: as a medium of exchange, a store of value, a unit of account, and a standard of deferred payment.
- net worth
- the excess of the asset value over and above the amount of the liability; total assets minus total liabilities
- payment system
- helps an economy exchange goods and services for money or other financial assets
- reserves
- funds that a bank keeps on hand and that are not loaned out or invested in bonds
- savings deposit
- bank account where you cannot withdraw money by writing a check, but can withdraw the money at a bank—or can transfer it easily to a checking account
- smart card
- stores a certain value of money on a card and then the card can be used to make purchases
- standard of deferred payment
- money must also be acceptable to make purchases today that will be paid in the future
- store of value
- something that serves as a way of preserving economic value that can be spent or consumed in the future
- T-account
- a balance sheet with a two-column format, with the T-shape formed by the vertical line down the middle and the horizontal line under the column headings for “Assets” and “Liabilities”
- time deposit
- account that the depositor has committed to leaving in the bank for a certain period of time, in exchange for a higher rate of interest; also called certificate of deposit
- transaction costs
- the costs associated with finding a lender or a borrower for money
- unit of account
- the common way in which market values are measured in an economy
Monetary Policy
- bank run
- when depositors race to the bank to withdraw their deposits for fear that otherwise they would be lost
- basic quantity equation of money
- money supply × velocity = nominal GDP
- central bank
- institution which conducts a nation’s monetary policy and regulates its banking system
- contractionary monetary policy
- a monetary policy that reduces the supply of money and loans
- countercyclical
- moving in the opposite direction of the business cycle of economic downturns and upswings
- deposit insurance
- an insurance system that makes sure depositors in a bank do not lose their money, even if the bank goes bankrupt
- discount rate
- the interest rate charged by the central bank on the loans that it gives to other commercial banks
- excess reserves
- reserves banks hold that exceed the legally mandated limit
- expansionary monetary policy
- a monetary policy that increases the supply of money and the quantity of loans
- federal funds rate
- the interest rate at which one bank lends funds to another bank overnight
- inflation targeting
- a rule that the central bank is required to focus only on keeping inflation low
- lender of last resort
- an institution that provides short-term emergency loans in conditions of financial crisis
- loose monetary policy
- see expansionary monetary policy
- open market operations
- the central bank selling or buying Treasury bonds to influence the quantity of money and the level of interest rates
- quantitative easing (QE)
- the purchase of long term government and private mortgage-backed securities by central banks to make credit available in hopes of stimulating aggregate demand
- reserve requirement
- the percentage amount of its total deposits that a bank is legally obligated to to either hold as cash in their vault or deposit with the central bank
- tight monetary policy
- see contractionary monetary policy
- velocity
- the speed with which money circulates through the economy; calculated as the nominal GDP divided by the money supply
