Money Functions & Forms
Economists identify three primary functions that any effective monetary system must fulfill: serving as a medium of exchange, a unit of account, and a store of value. What is the term for these three essential roles?
Functions of money
A bond promises to pay 5% annual interest, but if inflation runs at 2%, the bondholder's purchasing power increases by only 3%. This adjusted rate reflects the true economic benefit. What type of interest rate is this?
Real Interest Rate
Commercial banks must hold a certain percentage of their deposits as reserves, either in their vaults or at the Federal Reserve, to ensure they can meet withdrawal demands. What is this regulatory requirement called?
Reserve Ratio
When the Federal Reserve buys government securities from banks and securities dealers, it injects money into the banking system and increases bank reserves. What is this policy tool called?
Open market operations
The market where the Federal Reserve influences short-term interest rates through its monetary policy decisions represents the interaction between money supply and money demand. What is this market called?
Money market
When the Federal Reserve measures the money supply, it categorizes different types of money based on their liquidity. The narrowest measure includes only currency in circulation and checkable deposits. Name this measurement.
Banks advertise certificate of deposit rates and mortgage rates based on the actual percentage paid or charged, without adjusting for inflation's impact on purchasing power. What type of interest rate do these advertisements show?
Nominal Interest Rate
On a bank's balance sheet, customer deposits represent money the bank owes to account holders and must be available on demand. These obligations appear on which side of the balance sheet?
Liabilities
The Federal Reserve can influence the money supply by changing the percentage of deposits that banks must hold as reserves, though this tool is rarely used due to its powerful effects. Name this policy instrument.
Reserve requirement
Corporations and governments issue debt securities that promise to pay back the principal plus interest over time, allowing them to raise capital for long-term projects. What are these debt instruments called?
Bonds
Banks offer customers accounts that allow immediate access to funds through checks, debit cards, and electronic transfers, making these deposits highly liquid and part of the basic money supply. What are these accounts called?
Demand Deposits
When the Federal Reserve wants to influence short-term interest rates throughout the economy, it targets the rate at which banks lend excess reserves to each other overnight. Name this benchmark rate.
Federal Funds Rate
Banks use deposited funds to make loans and purchase securities, which generate interest income for the institution. These income-producing items appear on which side of the balance sheet?
Assets
To combat recession, the Fed typically implements policies that lower interest rates, increase money supply, and encourage borrowing and spending. What type of monetary policy is this?
Expansionary
Savers supply funds to borrowers through financial intermediaries, creating a market where the interest rate adjusts to balance the supply of savings with the demand for investment capital. Name this market.
Loanable funds marker
During periods of inflation, the purchasing power of money decreases over time, making it less effective at preserving wealth for future use. Which of money's three functions is most compromised by inflation?
Store of Value
Commercial banks can borrow directly from the Federal Reserve when they need short-term liquidity, though this option carries some stigma and is typically more expensive than private alternatives. What is this Fed lending rate called?
Discount Rate
When a bank receives a $1,000 deposit and the reserve requirement is 10%, it can lend out $900, which gets deposited elsewhere and creates more lending capacity. This process is called the money ______ .
Multiplier
During periods of high inflation, the Federal Reserve may raise interest rates and reduce money supply growth to cool down economic activity and reduce price pressures. This approach is called what type of monetary policy?
Contractionary
Stocks, bonds, bank deposits, and other instruments that represent claims on future income or wealth are collectively known by what term in economics?
Financial assets
Central banks distinguish between assets based on how quickly they can be converted to cash without significant loss of value. This characteristic determines an asset's position in the money supply hierarchy. Name this key property.
Liquidity
In the loanable funds market, the intersection of saving supply and investment demand determines the equilibrium cost of borrowing. This market-clearing price represents what economic concept?
Interest Rate
In 2020, the Federal Reserve shifted from a traditional reserve system where banks competed for limited reserves to one where abundant reserves eliminate the need for active reserve management. What is this newer system called?
Ample Reserves
Under the traditional monetary policy framework, banks actively managed their reserve positions and frequently borrowed from each other when reserves were scarce. This older system is called ______ reserves.
Limited
When bond prices fall, their yields rise, and when bond prices rise, their yields fall. This fundamental relationship demonstrates that bond prices and interest rates move in which direction relative to each other?
Opposite