Chapter 9- Money, Prices, and Financial Intermediaries

·      Financial intermediaries- firms that extend credit to borrowers using funds raised from savers

·      Money- any asset that can be used in making purchases; it has three principal uses: a medium of exchange, a unit of account, and a store of value

·      Medium of exchange- an asset used in purchasing goods and services

·      Barter- the direct trade of goods or services for other goods or services

·      Unit of account- a basic measure of economic value

·      Store of value- an asset that serves as a means of holding wealth

·      M1- the sum of currency outstanding and balances held in checking accounts

·      M2- all the assets in M1 plus some additional assets that are usable in making payments but at greater cost or inconvenience than currency or checks

·      Bank reserves- cash or similar assets held by commercial banks for the purpose of meeting depositor withdrawals and payments


·      100 percent reserve banking- a situation in which banks’ reserves equal 100 percent of their deposits

·      Reserve deposit ratio- bank reserves divided by deposits

·      Fractional reserve banking system- a banking system in which bank reserves are less than deposits so that the reserve-deposit ratio is less than 100 percent

·      Federal Reserve System (or the Fed)- the central bank of the United States

·      Monetary policy- determination of the nation’s money supply

·      Open market purchase- the purchase of government bonds from the public by the Fed for the purpose of increasing the supply of bank reserves and the money supply

·      Open market sale- the sale by the Fed of government bonds to the public for the purpose of reducing bank reserves and the money supply

·      Open market operations- open-market purchases and open-market sales

·      Velocity- a measure of the speed at which money changes hands in transactions involving final goods and services, or, equivalently, nominal GDP divided by the stock of money

·      Quantity equation- money times velocity equals nominal GDP