Money is any generally
accepted means of payment for
delivery of goods or settlement
of debt. It is the medium of
exchange.
A barter economy has no
medium of exchange. Goods
are swapped for other goods.
The unit of account is the unit
in which prices are quoted and
accounts kept.
Money is a store of value
because it can be used to
make future purchases.
A token money is a means of
payment whose value or
purchasing power as money greatly exceeds its cost of production or value in any
other use.
An IOU money is a medium of
exchange based on the debt of
a private firm or individual.
Bank reserves are the money
available in the bank to meet
possible withdrawals by
depositors. The reserve ratio is
the ratio of reserves to
deposits.
The money supply is the value
of the stock of the medium of
exchange in circulation.
Liquidity is the cheapness,
speed and certainty with which
asset values can be converted
back into money.
The money in sight deposits
can be withdraw ‘on sight’
without prior notice. Time
deposits, paying higher interest
rates, require the depositor to gice notice before withdrawing money.
A financial intermediary
specializes in bringing lenders
and borrowers together.
Commercial banks are
financial intermediaries licensed
to make loans and issue
deposits, including deposits
against which cheques can be
written.
The interest rate spread is the
excess of the loan interest rate
over the deposit interest rate.
A financial panic is a self-fulfilling
prophecy. Believing a
bank will be unable to pay,
people rush to get their money
out. But this makes the bank
goes bankrupt.
The monetary base or stock of
high-powered money is the
quantity of notes and coin in
private circulation plus the
quantity held by the banking industry.
The money multiplier is the
ratio of the money stock to the
monetary base.
The cost of holding money is
the interest given up by holding
money rather than bonds.
The transactions motive for
holding money reflects the fact
that payments and receipts are
not synchronized.
The demand for money is a
demand for real money
balances.
In an uncertain world, there is a
precautionary motive to hold
money. In advance, we decide
to hold money to meet
contingencies that we cannot
yet foresee.
The asset motive for holding
money reflects dislike of risk.
People sacrifice a high average
rate of return to obtain a
portfolio with a lower but safer
rate of return. |