Glossary: Monetary Policy

Money and Banking

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a bank’s liabilities can be withdrawn in the short term while its assets are repaid in the long term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
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
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
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
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
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
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
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
the speed with which money circulates through the economy; calculated as the nominal GDP divided by the money supply