Money Supply And The Federal Reserve System

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Barter

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The direct exchange of goods and services for othergoods and services.

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medium of exchange, or means of payment

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What sellersgenerally accept and buyers generally use to pay for goodsand services.

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store of value

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An asset that can be used to transportpurchasing power from one time period to another.

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liquidity property of money

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The property of money thatmakes it a good medium of exchange as well as a store ofvalue: It is portable and readily accepted and thus easilyexchanged for goods.

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unit of account

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A standard unit that provides a consistentway of quoting prices.

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commodity monies

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Items used as money that also have intrinsicvalue in some other use.

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fiat, or token, money

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Items designated as money that areintrinsically worthless.

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legal tender

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Money that a government has required to be acceptedin settlement of debts.

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currency debasement

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The decrease in the value of money thatoccurs when its supply is increased rapidly.

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M1, or transactions money

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Money that can be directlyused for transactions.

M1 ≡ currency held outside banks + demand deposits +traveler’s checks + other checkable deposits

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near monies

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Close substitutes for transactions money, suchas savings accounts and money market accounts.

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M2, or broad money

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M1 plus savings accounts, moneymarket accounts, and other near monies.

M2 ≡ M1 + savings accounts + money market accounts +other near monies

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financial intermediaries

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Banks and other institutions that act as alink between those who have money to lend and those who want toborrow money.

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run on a bank

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Occurs when many of those who have claims on abank (deposits) present them at the same time.

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reserves

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The deposits that a bank has at the FederalReserve bank plus its cash on hand.

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required reserve ratio

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The percentage of its total depositsthat a bank must keep as reserves at the Federal Reserve.

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excess reserves

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The difference between a bank’s actual reservesand its required reserves.

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money multiplier

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The multiple by which deposits can increase forevery dollar increase in reserves; equal to 1 divided by the requiredreserve ratio.

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lender of last resort

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One of the functions of the Fed: It providesfunds to troubled banks that cannot find any other sources of funds.

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discount rate

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The interest rate that banks payto the Fed to borrow from it.

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moral suasion

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The pressure that in the past theFed exerted on member banks to discouragethem from borrowing heavily from the Fed.

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open market operations

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The purchase and sale bythe Fed of government securities in the open market;a tool used to expand or contract the amount ofreserves in the system and thus the money supply