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Princples of Macro - Chs. 14-16
Money, Banking & Monetary Policy
53
Economics
Undergraduate 2
04/30/2014

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Term
Medium of exchange
Definition
any item sellers accept and buyers use to pay for goods and services
Term
Unit of account
Definition
a standard unit in which prices can be stated and the value of goods and services can be compared
Term
Store of value
Definition
an asset stored aside for future use
Term
Liquidity
Definition
the ease with which an asset can be converted into cash with little or no loss of purchasing power - money is 100% liquid
Term
M1
Definition
most narrow definition of the money supply; equal to currency in hands of public plus checkable deposits in banks and thrifts
Term
Federal Reserve Notes
Definition
paper money issued by the Federal Reserve Banks
Term
Token money
Definition
bills/coins for which the amount printed on the currency bears no relationship to the value of the paper/metal it is made with
Term
Checkable deposits
Definition
any deposit in a commercial bank or thrift against which a check can be written
Term
Commercial banks
Definition
a firm that engages in the business of banking (accepts deposits, offers checking accounts, and makes loans)
Term
Thrift institutions
Definition
a savings and loan association, mutual savings bank, or credit union
Term
Near-monies
Definition
financial assets, including noncheckable savings accounts, time deposits, and U.S. short-term securities and savings bonds; aren't a M.O.E., but can be converted into money
Term
M2
Definition
Broader definition of money supply; equal to (M1 + noncheckable savings accounts + small time deposits (<100K) + individual MMMF balances)
Term
Savings account
Definition
a deposit in a CB or thrift on which interest payments are received
Term
Money market deposit account (MMDA)
Definition
Bank- and thrift-provided interest-bearing accounts that contain a variety of short-term securities; have minimum balance and limited withdrawal
Term
Time deposits
Definition
Interest-earning deposit in a CB/thrift which can be withdrawn w/out penalty after a certain period of time
Term
Money market mutual fund (MMMF)
Definition
Interest-bearing accounts offered by investment firms; pool depositors' funds for purchase of short-term securities
Term
Legal tender
Definition
A nation's official currency (bills & coins); payment of debts must be accepted in this monetary unit
Term
Federal Reserve System
Definition
U.S. central bank; consists of Board of Governors of Fed. Reserve and 12 Federal Reserve Banks; controls money supply
Term
Board of Governors
Definition
7-member group that supervises and controls the money & banking system of the US
Term
Federal Reserve Banks
Definition
the 12 banks chartered by the U.S. government to control the money supply; act simultaneously as central bank, quasi-public banks, and bankers' banks
Term
Federal Open Market Committee (FOMC)
Definition
12-member committee that determines purchase/sale policies of the FRBs in the U.S. gov't securities market
Term
Subprime mortgage loans
Definition
High-interest rate loans to home buyers with above-average credit risk
Term
Mortgage-backed securities (MBS)
Definition
Bonds that represent claims to all or part of the monthly mortgage payments from the pools of mortgage loans made by lenders to borrowers
Term
Securitization
Definition
Process of aggregating many individual financial debts (mortgages, student loans, etc.) into a pool and then issuing new securities backed by the pool; holders are entitled receive the debt payments
Term
Moral hazard
Definition
Tendency for financial firms to take greater risks under the idea that they are at least partially insured in case of loss
Term
Troubled Asset Relief Program (TARP)
Definition
2008 Federal gov't program which authorized the US Treasury to loan up to $700B to critical financial institutions in danger of failure
Term
Financial services industry
Definition
Broad category of firms that provide financial products/services to help households+businesses earn interest, receive dividends, obtain capital gains, insure against losses, and plan for retirement. Includes banks, thrifts, insurance companies, mutual fund companies, pension funds, investment banks, and securities firms
Term
Wall Street Reform and Consumer Protection Act
Definition
Federal law giving the Federal Reserve System authority to regulate all large financial institutions, created an oversight council to look for growing risk in the financial system, established a process for the Federal gov't to sell off the assets of large failing financial institutions, provided Federal regulatory oversight of asset-backed securities, and created a financial consumer protection bureau within the Fed
Term
Fractional-reserve banking system
Definition
A system in which commercial banks and thrift institutions hold less than 100% of their checkable-deposit liabilities as required reserves
Term
Balance sheet
Definition
A statement of assets, liabilities, and net worth of a firm or individual at a given time
Term
Vault cash
Definition
The currency a bank has in its vault and cash drawers
Term
Required reserves
Definition
The funds that banks/thrifts must deposit with the FRB (or store as vault cash) to meet legal reserve requirements; is a fixed % of checkable-deposits
Term
Reserve ratio
Definition
Fraction of checkable deposits that a bank must hold as reserves in a FRB or in its own bank vault
Term
Excess reserves
Definition
Amount by which a bank/thrift's actual reserves exceed its required reserves
Term
Actual reserves
Definition
The funds a bank has on deposit at the FRB in its district
Term
Federal funds rate
Definition
The interest rate banks and other depository institutions charge one another on overnight loans made out of their excess reserves
Term
Monetary multiplier
Definition
The multiple of its excess reserves by which the banking system can expand checkable deposits and thus the money supply by making new loans (or buying securities); equal to 1/reserve requirment; m=1/R
Term
Monetary policy
Definition
A central bank's changing of the money supply to influence interest rates and assist the economy in achieving price stability, full employment, and economic growth
Term
Interest
Definition
Payment made for the use of money (or borrowed funds)
Term
Transactions demand for money
Definition
The amount of money people want to hold for use as a medium of exchange (to make payments); varies directly with nominal GDP
Term
Asset demand for money
Definition
The amount of money people want to hold as a store of value; varies inversely with the interest rate
Term
Total demand for money
Definition
The sum of the transactions demand for money and the asset demand for money
Term
Open-market operations
Definition
The buying/selling of US gov't securities by the FRBs for the purposes of carrying out monetary policy
Term
Reserve ratio
Definition
The fraction of checkable deposits that a bank must hold as reserves in a FRB or in its own bank vault
Term
Discount rate
Definition
The interest rate that the FRBs charge on the loans they make to CBs/thrifts
Term
Term auction facility
Definition
The monetary policy procedure used by the Fed, in which CBs anonymously bid to obtain loans being made available by the Fed as a way to expand reserves in the banking system
Term
Federal funds rate
Definition
The interest rate banks and other depository institutions charge one another on overnight loans made out of their excess reserves
Term
Expansionary monetary policy
Definition
Federal Reserve System actions to increase the money policy, lower interest rates, and expand real GDP; "easy money" policy
Term
Restrictive monetary policy
Definition
Federal Reserve System actions to reduce the money supply, increase interest rates, and reduce inflation; "tight money" policy
Term
Prime interest rate
Definition
The benchmark interest rate that banks use as a reference point for a wide range of loans to businesses and individuals
Term
Taylor Rule
Definition
A modern monetary rule proposed by economist John Taylor that would stipulate exactly how much the Fed should change real interest rates in response to divergences of real GDP from potential GDP and actual rates of inflation from a target rate of inflation
Term
Cyclical asymmetry
Definition
The idea that monetary policy may be more successful in slowing expansions and controlling inflation than in extracting the economy from severe recession
Term
Liquidity trap
Definition
A situation in a severe recession in which the Fed's injection of additional reserves into the banking system has little or no additional positive impact on lending, borrowing, investment, or aggregate demand
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