Economics Chapter on Money Functions

A situation where two individuals each have a good or service the other wants, enabling a direct exchange.

A medium of exchange that is widely accepted for goods and services, making trade easier and less reliant on bartering.

The ability of money to be used in a chain of transactions, allowing individuals to specialize in their skills and contribute to economic growth.

The process by which banks create new money by lending out a portion of deposited funds.

The amount of money in circulation within an economy, influenced by government policies.

A sustained increase in the general price level of goods and services in an economy.

The cost of borrowing money, expressed as a percentage of the borrowed amount.

The level of economic activity in a country, measured by factors such as employment, production, and GDP.

Those items regularly accepted by sellers in exchange for goods and services.

Money serves as a medium of exchange, a unit of account, and a store of value.

Money is a medium of exchange because it facilitates transactions by eliminating the need for direct barter.

Money acts as a common measure of value, making it easy to compare prices of different goods and services.

Money can be saved and used to purchase goods and services in the future.

The total amount of money available in an economy for transactions.

Money held in a checking account that can be accessed on demand by writing a check or using a debit card.

The process of including various financial instruments in the calculation of the money stock.

Balances in bank accounts that depositors can access on demand by writing a check or using a debit card.

The value of goods and services in an economy.

Monetary assets like checking accounts, savings accounts, and money market mutual funds that are easily converted into cash.

A shift of funds from savings accounts to checking accounts.

The process of determining the appropriate financial instruments to include in the money stock.

Fiat money is accepted not only by government decree but also because people believe it will be accepted in the future by others. This belief is important for its value.

Cryptocurrencies are digital currencies using cryptography to secure transactions and maintain a decentralized record. They are not issued by governments.

Blockchain technology is a decentralized, public ledger used by cryptocurrencies to keep track of transactions. It ensures transparency and security.

Bitcoin was the first cryptocurrency, created in 2009 by Satoshi Nakamoto. It uses blockchain technology for secure and transparent transactions.

The value of bitcoin has fluctuated significantly due to its nascent nature and market speculation. It experienced high volatility in its early years.

Cryptocurrencies have potential benefits, but also risks. They offer anonymity which can be used for illicit activities and are susceptible to hacking and fraud.

The acceptance of cryptocurrencies as a form of payment varies. Some businesses accept them, while others remain hesitant due to volatility and regulation.

Cryptocurrencies are a subject of ongoing debate with potential and challenges that require careful consideration. They offer a new way of thinking about money and finance.

The total amount of money available in an economy, including physical currency and demand deposits held in banks.

Banks create new money by lending out a portion of their deposits, even though they only hold a fraction of those deposits in reserve.

The practice of banks keeping only a fraction of deposits in reserve and lending out the rest, which allows for money creation within the banking system.

When banks create money through lending, they generate a corresponding liability for the borrowers who receive the loans.

While money creation increases the amount of money available for transactions, it doesn't necessarily create new wealth in the economy.

A measure of how easily assets can be converted into cash.

The ability to exchange something easily and directly for other goods and services.

The economy is no wealthier after money creation because the newly created money represents a corresponding increase in debt.

The amount of money that the banking system generates with each dollar of reserves.

The ratio of a bank's reserves to its deposits.

The inverse of the reserve ratio. It tells us how much money the banking system can create for each dollar of reserves.

The size of the money multiplier is determined by the reserve ratio.

A higher reserve ratio means a smaller money multiplier. This is because banks have to keep more of their deposits as reserves, limiting their ability to create new money.

A lower reserve ratio means a higher money multiplier. Banks can lend out more of their deposits, leading to a greater expansion of the money supply.

If the reserve ratio is 1/10, each dollar of reserves can generate $10 of money in the economy.

The money multiplier is a key concept in understanding how banks create money and how the money supply changes.