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KAPLAN BU204-4 UNIT 8; CHAPTER 13 &14 Nicholas Bergan Key Terms Chapter 13 Money is any asset that can easily be used to purchase goods and services. Currency in circulation is cash held by the public. Checkable bank deposits are bank accounts on which people can write checks. The money supply is the total value of financial assets in the economy that are considered money. A medium of exchange is an asset that individuals acquire for the purpose of trading rather than for their own consumption. A store of value is a means of holding purchasing power over time. A unit of account is a measure used to set prices and make economic calculations. Key Terms Chapter 13 Commodity money is a good used as a medium of exchange that has other uses. A commodity-backed money is a medium of exchange with no intrinsic value whose ultimate value is guaranteed by a promise that it can be converted into valuable goods. Fiat money is a medium of exchange whose value derives entirely from its official status as a means of payment. A monetary aggregate is an overall measure of the money supply. Near-moneys are financial assets that can’t be directly used as a medium of exchange but can readily be converted into cash or checkable bank deposits. Key Terms for Chapter 13 A bank is a financial intermediary that uses liquid assets in the form of bank deposits to finance the illiquid investments of borrowers. Bank reserves are the currency banks hold in their vaults plus their deposits at the Federal Reserve. The reserve ratio is the fraction of bank deposits that a bank holds as reserves. A T-account summarizes a bank’s financial position. A bank run is a phenomenon in which many of a bank’s depositors try to withdraw their funds due to fears of a bank failure. Key Terms for Chapter 13 Deposit Insurance-guarantees that a bank’s depositors will be paid even if the bank can’t come up with the funds, up to a maximum amount per account. Capital Requirements-regulators require that the owners of banks hold substantially more assets than the value of bank deposits. Reserve Requirements-rules set by the Federal Reserve that determine the minimum reserve ratio for a bank. Excess reserves are bank reserves over and above its required reserves. The monetary base is the sum of currency in circulation and bank reserves. The money multiplier is the ratio of the money supply to the monetary base. Key Terms for Chapter 13 – Federal Reserve A central bank is an institution that oversees and regulates the banking system and controls the monetary base. The Federal Reserve is a central bank—an institution that oversees and regulates the banking system, and controls the monetary base. The federal funds market allows banks that fall short of the reserve requirement to borrow funds from banks with excess reserves. The federal funds rate is the interest rate determined in the federal funds market. The discount rate is the rate of interest the Fed charges on loans to banks. Key Terms Chapter 14 Short-term interest rates are the interest rates on financial assets that mature within six months or less. Long-term interest rates are interest rates on financial assets that mature a number of years in the future. The money demand curve shows the relationship between the quantity of money demanded and the interest rate. The real money demand curve shows the relationship between the real quantity of money demanded and the interest rate. The velocity of money is nominal GDP divided by the nominal quantity of money. According to the liquidity preference model of the interest rate, the interest rate is determined by the supply and demand for money. The money supply curve shows how the nominal quantity of money supplied varies with the interest rate. Key Terms Chapter 14 Expansionary monetary policy is monetary policy that increases aggregate demand. Contractionary monetary policy is monetary policy that reduces aggregate demand. Monetary neutrality: changes in the money supply have no real effect on the economy. Review Questions 1. Which of the following combination of assets are considered to be money? 2. When countries replaced gold and silver coins with paper money exchangeable for certain amounts of precious metals, the monetary system evolved from _______. 3. Banks can lend money because ______. Review Questions Cont. 4. Banks create money when they ______. 5. To change the money supply, the Fed most frequently uses _______. 6. An increase in the aggregate price _______. 7. The loanable funds model focuses on the ______. Review Questions Cont. 8. Expansionary monetary policy _______. 9. In the long run, changes in the money supply _______. 10. All of the following factors shift the real money demand curve to the right except a(n) _______. Questions for Chapters 6 & 7 Questions?