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medium of exchange

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Any item sellers generally accept and buyers generally use to pay for a good or service; money; a convenient means of exchanging goods and services without engaging in barter.

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unit of account

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A standard unit in which prices can be stated and the value of goods and services can be compared; one of the three functions of money.

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store of value

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An asset set aside for future use; one of the three functions of money.

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liquidity

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The degree to which an asset can be converted quickly into cash with little or no loss of purchasing power. Money is said to be perfectly liquid, whereas other assets have lesser degrees of liquidity.

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M1

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The most narrowly defined money supply, equal to currency in the hands of the public and the checkable deposits of commercial banks and thrift institutions.

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Federal Reserve Notes

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Paper money issued by the Federal Reserve Banks.

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token money

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Bills or coins for which the amount printed on the currency bears no relationship to the value of the paper or metal embodied within it; for currency still circulating, money for which the face value exceeds the commodity value.

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checkable deposits

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Any deposit in a commercial bank or thrift institution against which a check may be written.

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commercial banks

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A firm that engages in the business of banking (accepts deposits, offers checking accounts, and makes loans).

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thrift institutions

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A savings and loan association, mutual savings bank, or credit union.

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near-money

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a financial asset that cannot be directly used as a medium of exchange but can be readily converted into cash or checkable bank deposits

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M2 or near moneys

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A more broadly defined money supply, equal to M1 plus noncheckable savings accounts (including money market deposit accounts), small time deposits (deposits of less than $100,000), and individual money market mutual fund balances.

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savings account

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A deposit in a commercial bank or thrift institution on which interest payments are received; generally used for saving rather than daily transactions; a component of the M2 money supply.

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money market deposit account (MMDA)

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Interest-bearing accounts offered by commercial banks and thrift institutions that invest deposited funds into a variety of short-term securities. Depositors may write checks against their balances, but there are minimum-balance requirements as well as limits on the frequency of check writing and withdrawls.

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time deposits

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An interest-earning deposit in a commercial bank or thrift institution that the depositor can withdraw without penalty after the end of a specified period.

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money market mutual fund (MMMF)

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(MMMFs) Mutual funds that invest in short-term securities. Depositors can write checks in minimum amounts or more against their accounts.

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legal tender

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Any form of currency that by law must be accepted by creditors (lenders) for the settlement of a financial debt; a nation's official currency is legal tender within its own borders.

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Federal Reserve System

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the U.S. central bank, consisting of the Board of Governors of the Federal Reserve and the 12 Federal Reserve Banks, which controls the lending activity of the nation's banks and thrifts and thus the money supply; commonly referred to as the \"Fed.

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Board of Governors

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The seven-member group that supervises and controls the money and banking system of the United States; the Board of Governors of the Federal Reserve System; the Federal Reserve Board.

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Federal Reserve Banks

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The 12 banks chartered by the U.S. government that collectively act as the central bank of the United States. They set monetary policy and regulate the private banking system under the direction of the Board of Governors and the Federal Open Market Committee. Each of the 12 is a quasi-public bank and acts as a banker's bank in its designated geographic region.

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Federal Open Market Committee (FOMC)

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The 12-member group within the Federal Reserve System that decides U.S. monetary policy and how it is executed through open-market operations (in which the Fed buys and sells U.S. government securities to adjust the money supply.)

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subprime mortgage loans

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High-interest-rate loans to home buyers with above-average credit risk.

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mortgage-backed securities

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Bonds that represent claims to all or part of the monthly mortgage payments from the pools of mortgage loans made by leaders to borrowers to help them purchase residential property.

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securitization

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The process of aggregating many individual financial debts, such as mortgages, into a pool and then issuing new securities (typically bonds) backed by the pool. The holders of the new securities are entitled to receive the debt payments made on the individual financial debts in the pool.

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Troubled Asset Relief Program (TARP)

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A 2008 federal government program that authorized the U.S. Treasury to loan up to $700 billion to critical financial institutions and other U.S. firms that were in extreme financial trouble and therefore at high risk of failure

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moral hazard

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The possibility that individuals or institutions will change their behavior as the result of a contract or agreement. Example: A bank whose deposits are insured against losses may make riskier loans and investments.

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financial services industry

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The broad category of firms that provide financial products and services to help households and businesses earn interest, receive dividends, obtain capital gains, insure against losses, and plan for retirement. Includes commercial banks, thrift

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Wall Street Reform and Consumer Protection Act

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The law that gave authority to the Federal Reserve System (the Fed) to regulate all large financial institutions, created an oversight council to look for growing risk to the financial system, established a process for the federal government 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.

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Acceptability

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Currency and checkable deposits are money because people accept them as money. By virtue of long-standing business practice, currency and checkable deposits perform the basic function of money: They are acceptable as a medium of exchange. We accept paper money in exchange because we are confident it will be exchangeable for real goods, services, and resources when we spend it.

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Legal Tender

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Our confidence in the acceptability of paper money is strengthened because the government has designated currency as legal tender. That means paper money is a valid and legal means of payment of any debt that was contracted in dollars.

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Relative Scarcity

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The value of money, like the economic value of anything else, depends on its supply and demand. Money derives its value from its scarcity relative to its utility (its want-satisfying power). The utility of money lies in its capacity to be exchanged for goods and services, now or in the future. The economy's demand for money thus depends on the total dollar volume of transactions in any period plus the amount of money individuals and businesses want to hold for future transactions.

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V or value of a dollar is = to

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1 divided by the price level

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The 12 Federal Reserve Banks

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Boston, New York, Philadelphia, Richmond, Cleveland, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, San Francisco.

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responsibility of the Fed

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Issuing currency, setting reserve requirements and holding reserves, Lending to financial institutions and serving as an emergency lender of last resort, Providing for check collection, Acting as fiscal agent, supervising banks, and Controlling the money supply

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primary Dealer Credit Facility (PDCF)

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Provided overnight loans to primary dealers who were willing to post loan-backed securities as collateral. (The Fed kept the collateral on any loan that was not repaid on time.) Primary dealers are the 21 major financial institutions that the Fed uses to buy and sell U.S. securities.

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Term Securities Lending Facility (TSLF)

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Lent U.S. securities to primary dealers for one-month terms to promote liquidity in the markets for these U.S. securities. The financial institutions obtained the securities from the Fed through participating in competitive single-bid auctions.

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Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility

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Provided loans to U.S. banks and thrifts to finance their purchases of commercial paper from money market mutual funds. Commercial paper consists of asset-backed, short-term IOUs that are mainly issued by corporations. These short-term loans are vital for financing the day-to-day operations of businesses.

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Commercial Paper Funding Facility (CPFF)

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Purchased commercial paper to support the commercial paper market and therefore the short-term credit needs of businesses.

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Money Market Investor Funding Facility (MMIFF)

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Provided funding support to a private-sector initiative designed to ensure the liquidity of U.S. money market mutual funds. Many Americans rely on money market mutual funds as low-risk investments.

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Term Asset-Backed Securities Loan Facility (TALF)

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Helped households and business with their credit needs by providing funding support for asset-backed securities collateralized by student loans, auto loans, credit card loans, and loans guaranteed bythe Small Business Administration (SBA).

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interest payments on reserves

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Bolstered the profitability of banks by paying interest on the reserves they hold in their vaults or in the Federal Reserve Banks.

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Issuing currency

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The Federal Reserve Banks issue Federal Reserve Notes, the paper currency used in the U.S. monetary system. (The Federal Reserve Bank that issued a particular bill is identified in black in the upper left of the front of the newly designed bills.

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Setting reserve requirements and holding reserves

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The Fed sets reserve requirements, which are the fractions of checking account balances that banks must maintain as currency reserves. The central banks accept as deposits from the banks and thrifts any portion of their mandated reserves not held as vault cash.

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Lending to financial institutions and serving as an emergency lender of last resort

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The Fed makes routine short-term loans to banks and thrifts and charges them an interest rate called the discount rate. It also occasionally auctions off loans to banks and thrifts through its Term Auction Facility,. In times of financial emergencies, the Fed serves as a lender of last resort to critical parts of the U.S. financial industry.

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Providing for check collection

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The Fed provides the banking system with a means for collecting on checks. If Sue writes a check on her Miami bank or thrift to Joe, who deposits it in his Dallas bank or thrift, how does the Dallas bank collect the money represented by the check drawn against the Miami bank? Answer: The Fed handles it by adjusting the reserves (deposits) of the two banks.

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Acting as fiscal agent

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The Fed acts as the fiscal agent (provider of financial services) for the federal government. The government collects huge sums through taxation, spends equally large amounts, and sells and redeems bonds. To carry out these activities, the government uses the Fed's facilities.

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Supervising banks

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The Fed supervises the operations of banks. It makes periodic examinations to assess bank profitability, to ascertain that banks perform in accordance with the many regulations to which they are subject, and to uncover questionable practices or fraud.

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Controlling the money supply

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Finally, the Fed has ultimate responsibility for regulating the supply of money, and this enables it to influence interest rates. The major task of the Fed under usual economic circumstances is to manage the money supply (and thus interest rates) according to the needs of the economy. This involves making an amount of money available that is consistent with high and rising levels of output and employment and a relatively stable price level. While most of the other functions of the Fed are routine activities or have a service nature, managing the nation's money supply requires making basic, but unique, policy decisions.

ECON CHAP 14

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