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24 terms

Chapter 3 Study Guide

STUDY
PLAY
aggregate measures
used to estimate money supply's size
commodity money
based on some item of value
discount rate
the interest rate that the Federal Reserve sets and charges for loans to member banks
excess reserves
the reserves that a bank holds beyond the federal reserve requirement
federal funds rate
the amount of interest charged for short-term inter bank loans
liquidity
the measure of how quickly things may be converted into something of value such as cash
fractional reserve system
a system where a fraction of total money that was deposited must be kept in reserve
money supply
the liquid assets held by banks and individuals
multiplier effect
it is money that is to create more money and is calculated by dividing total bank deposits by the reserve requirements
primary reserves
consist of cash on hand, deposits that may be due from other banks, and the percentage required by the Fed held in a vault of deposit in District Reserve bank
prime rate
the interest rate that banks charge their best and most reliable customers
M1
money that can be spent immediately
M2
all the money in M1 plus short-term investments
M3
all the money in M1 and M2 plus large deposits
fiat money
money that is deemed legal tender by the government and is not based on or convertible to a commodity
secondary reserves
include securities the bank purchases from the Federal Government usually in the form of government securities
determining factors of interest rates
market forces, competition between banks, and the Federal Reserve (sometimes)
role of interest rates on the economy
Low interest rates can stimulate economic development because the more cash you have available, the more likely you are to buy something
why do banks like low interest rates?
they get more profit because of more customers. they also beat the competition.
how are the federal fund rate changes passed on to customers?
the banks adjust their prime rate
3 types of money
commodity money, receipt money, and fiat money
commodity money
based on an item of value (gold)
receipt money
could be exchanged for a real commodity (bank notes)
3 types of bank reserves
primary, secondary, and excess