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1. medium of exchange
2. store of value
3. unit of account

fiat money

money that has neither intrinsic value or the backing of a commodity with intrinsic value; currency is an example

liquid asset

an asset that can be easily converted to money without loss of value

M1 money supply

the sum of currency in circulation, checkable deposits maintained in depository institutions, and travelers checks


medium of exchange made of metal of paper

demand deposits

non-interest earning deposits that can be either withdrawn or made payable on demand to a third party.
ex. currency

Other checkable deposits

interest earning deposits that are also available for checking

M2 money supply

equal M1 plus savings deposits, time deposits (accounts of less than $100,00) held in depository institutions, and money market mutual fund shares.

Money market mutual funds

interest earning accounts that pool depositors funds and invest them in highly liquid short-term securities. Because these securities can be quickly converted to cash, depositors are permitted to write checks (which reduce their shareholdings) against their accounts

Depository Institutions

businesses that accept checking and savings deposits and use a portion of them to extend loans and make investments. Banks, savings and loan associations and credit unions are examples.

Bank reserves

vault cash plus deposits of banks with Federal Reserve banks

Required reserves

the minimum amount that a bank is required to keep on had to back up deposits

Required reserve ratio

the ratio of reserves relative that banks are required to maintain in their vaults

Excess reserves

actual reserves that exceed the legal requirement

Potential deposit expansion multiplier

maximum potential increase in the money supply as new reserves are injected


- a federally chartered corporation that insures the deposits held by commercial banks, savings and loans, and credit unions

Federal Open Market Committee (FOMC)

a committee of the Federal Reserve that establishes Fed policy with regard to the buying and selling of government


the primary mechanism used to control the money supply. It is composed of the seven members of the Board of Governors and the twelve district bank presidents of the Fed

open market operations

buying and selling of U.S. securities and other financial assets in the open market by the Fed

discount rate

the interest rate the Fed charges banks for short-term loans

federal funds market

a loanable funds market in which banks seeking additional reserves borrow short-term funds (generally for seven days or less) from banks with excess reserves

Federal funds rate

the interest rate in the federal funds market

Term Auction Facility (TAF)

newly established procedure used by the fed to auction credit for an eighty four day period to depository institutions willing to bid the highest interest rates for the funds

Monetary base

the sum of currency in circulation plus bank reserves (vault cash and reserves with the Fed; it reflects the purchases of financial assets and extension of loans by the Fed

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