Money, Banking, and the Financial System Free Online FlashCards

What does the financial system do?

The financial system consists of institutions, markets, and payment arrangements that transfer funds from savers to borrowers and help people manage risk.

What are the main functions of commercial banks?

Commercial banks accept deposits, make loans, process payments, and create deposit money when they lend.

How do stocks and bonds differ?

A stock represents partial ownership of a corporation, while a bond represents a loan to a corporation or government.

Why is money called a medium of exchange?

Money is a medium of exchange when buyers use it to purchase goods and services and sellers accept it as payment, avoiding the double coincidence of wants required by barter.

What does money do as a unit of account?

Money is a unit of account because it provides a common way to measure and compare the value of goods, services, debts, and income.

Why is money an imperfect store of value?

Money is a store of value because it transfers purchasing power into the future. It is imperfect because inflation reduces its purchasing power.

What is the monetary-base formula?

Monetary Base = Currency in Circulation + Reserve Balances.

How is M2 broader than M1?

M2 equals M1 plus small-denomination time deposits and retail money market funds. M2 is broader because these added assets are less liquid than everyday transaction balances.

Why is money not the same as wealth?

Money is not the same as wealth. Wealth includes money plus assets such as stocks, real estate, and durable goods; stocks are valuable but usually are not accepted directly as payment.

How does a $1,000 bank loan create deposit money?

The bank records a $1,000 loan as a $1,000 asset and credits a $1,000 deposit as a liability. The loan therefore creates a new bank deposit rather than merely transferring existing currency.

Calculate required and excess reserves for $10,000 at 20%.

Required reserves = deposits × required reserve ratio. With $10,000 in deposits and a 20% ratio, required reserves are $2,000; if actual reserves are $3,000, excess reserves are $1,000.

What is the current U.S. reserve-requirement rule?

The Federal Reserve reduced reserve requirement ratios to zero percent effective March 26, 2020. The positive-ratio AP model is therefore a simplified framework, not the current U.S. reserve rule.