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14.33: Glossary: Monetary Policy

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    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    a bank’s liabilities can be withdrawn in the short term while its assets are repaid in the long term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
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