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Macro Exam 3 Definitions
Terms in this set (28)
That part of a person's wealth that serves as a
medium of exchange, unit of account, and a store of value.
MEDIUM OF EXCHANGE
Anything that is used to pay for goods
STORE OF VALUE
The characteristic of retaining purchasing
power over time.
UNIT OF ACCOUNT
Anything used to measure value in an
Paper currency decreed by a government as legal
tender but not convertible into precious metal.
: The relative ease and speed with which an asset
can be converted into a medium of exchange.
A firm that channels funds from
savers to borrowers by accepting deposits from savers and
making loans to borrowers.
FRACTIONAL RESERVE BANKING
A banking system in which banks
hold reserves that are less than the amount of total
Minimum reserve holdings legally
mandated by the Federal Reserve.
An asset requirement mandated by the
central bank. Only cash held by depository institutions in
their vaults or deposits held at the regional Federal
Reserve Bank qualify as legal reserves.
Reserves held over and above required
REQUIRED RESERVE RATIO
The ratio of required reserves to
total deposits mandated by the Federal Reserve (the Fed).
Banks may keep a higher proportion of their assets as
reserves so the ratio specified by the Fed is a minimum.
The excess of assets over liabilities, or equity
THE SIMPLE MONEY MULTIPLIER
Relates changes in reserves in
the banking system to changes in the money supply when
there are no conversions of reserves into currency or
excess reserves in the various rounds of the multiplier
THE COMPLEX MULTIPLIER
Relates changes in the monetary
base to changes in the money supply when demand deposits
can be converted into currency in the various rounds of the
multiplier process and banks can keep positive excess
reserves for precautionary reasons.
The sum of the reserves in the banking
system plus the amount of circulating currency.
: A situation where depositors of a bank which has
pursued unwise investments will rush to their bank and
convert their deposits into currency to avoid losing their
deposits when the bank fails. The fact that bank customers
can withdraw their funds when doubts about the safety and
soundness of the bank arise causes banks to avoid unwise
investments whenever possible
Starts as a run on insolvent banks which
spreads to solvent banks; consequently, many banks
experience runs regardless of whether they are insolvent or
solvent. Depositors will rush to convert their deposits
into currency at these banks, thereby forcing even solvent
banks to sell off a lot of their interest earning assets;
unfortunately, some of these assets are highly illiquid and
can only be sold for fire-sale prices. As a result, many
solvent banks may not be able to meet their customers'
immediate demands for currency and will become insolvent.
FEDERAL RESERVE SYSTEM
The central bank in the United
States which is responsible for managing the money supply.
The system is divided into 12 regional banks which are
responsible for carrying out the monetary policies set by
the Board of Governors in Washington, D.C.
FEDERAL OPEN MARKET COMMITTEE (FOMC)
The committee which
executes open market operations as part of the Board of
Governors' monetary policy.
OPEN MARKET OPERATIONS (OMO)
The buying and selling of
government securities by the FOMC in order to change the
level of reserves in the banking system.
COUNTERCYCLICAL MONETARY POLICY
A monetary policy which is
designed to stabilize the fluctuations in GDP by:
(a) increasing the money supply (an expansionary
monetary policy) when a recession occurs in order to
stimulate private expenditures or
(b) decreasing the money supply (a contractionary
monetary policy) in the expansion phase of the
business cycle in order to reduce private expenditures
PROCYCLICAL MONETARY POLICY
A monetary policy which
unintentionally destabilizes the economy by following an
expansionary monetary policy in the expansion phase of the
business cycle and a contractionary monetary policy in the
recession phase of the business cycle.
FREE BANKING SYSTEM
: A banking system which is
characterized by the lack of a central bank and the ability
of each bank to print its own currency.
The process by which bank notes are
returned to the bank of issue by those who have accepted
the notes in payment but who prefer to use the currency of
their own bank. (The issuing bank will lose reserves
through this process whenever it over-issues its notes.)
SECONDARY NOTE MARKET
This market arises when a bank's
notes circulate beyond the local area where its reputation
for safety is not well known. In this case, other banks
which can easily develop knowledge about the safety of Bank
A will accept its notes at face value only when Bank A is
quite safe. If Bank A is in some danger of becoming
insolvent, its notes will trade at a discount.
These institutions lower the costs of
returning notes to issuing banks by acting as an
intermediary between accepting bank and issuing bank
Contractual clauses which are attached to a
bank's notes stating the conditions under which a bank will
not redeem their notes. Typically, banks in this situation
offer to pay the note holders interest as a penalty for not
redeeming their notes on demand. Such clauses help banks
which are under pressure from note holders for redemption
to reduce and delay the need for liquidating relatively
illiquid assets and thereby decrease the risk of
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