DSST Money and Banking key terms

The function of money as something generally accepted in payment for goods and services, letting people trade without needing a double coincidence of wants between two barter partners.

The function of money as a way to hold purchasing power over time so that value earned today can be spent later, though inflation erodes that power.

The function of money as the common yardstick in which prices, debts, and accounting records are quoted, making it easier to compare the value of unlike goods.

A narrow measure of the money supply comprising currency held by the public plus checkable deposits and similar transaction accounts at depository institutions.

A broader money measure that adds to M1 such items as savings deposits, small time deposits, and retail money market mutual fund balances.

Currency that has value because a government declares it legal tender and the public accepts it, not because it is redeemable for a fixed quantity of gold or silver.

Money that a law requires creditors to accept when offered in settlement of a debt, giving it a legally enforced role in transactions within a jurisdiction.

The revenue a currency issuer gains by creating money, roughly the difference between the face value of new notes or coins and the cost of producing them.

The quantity of real goods and services a unit of money can buy, which falls when the general price level rises and rises when prices fall.

The value today of a future cash payment or stream of payments, found by discounting those amounts at an appropriate interest rate.

The single interest rate that makes the present value of a bond's remaining coupon and principal payments equal its current market price, assuming the bond is held to maturity.

A debt security that pays the holder fixed interest amounts at set intervals and repays a stated principal amount on the maturity date.

A debt instrument sold below its face value that pays no periodic interest; the holder's return comes from the difference between the purchase price and the amount received at maturity.

The danger that a rise in market interest rates will reduce the price of a bond or other fixed-income asset already held, causing a capital loss for the owner.

A measure of how long, in present-value-weighted terms, a bond's cash flows take to arrive; it also approximates the percentage price change for a one percentage point rate change.

The pattern of yields on bonds identical in all respects except maturity, usually displayed as a yield curve showing how time to maturity affects the interest rate.

A graph plotting the yields of comparable bonds against their times to maturity, whose slope signals market expectations about future rates and economic conditions.

The proposition that long-term interest rates equal the average of short-term rates expected over the life of the long bond, so an upward slope implies expected rate increases.

An explanation of the yield curve holding that long-term rates include a premium compensating investors for the greater price risk and lower liquidity of longer maturities, so curves usually slope upward.

A fund that pools investor cash and buys short-term, high-quality debt instruments such as Treasury bills and commercial paper, aiming to keep a stable share price.

Unsecured short-term debt issued by large corporations to raise working capital, typically maturing in days to a few months and sold at a discount.

The process by which institutions channel funds from savers with surplus money to borrowers who need capital, transforming maturities, sizes, and risk along the way.

A problem arising before a transaction is completed, when the party with less information attracts the wrong counterparties, as when borrowers with the riskiest projects seek loans most eagerly.

A problem arising after a transaction, when one party takes on extra risk because the other party bears the consequences, such as a borrower investing in gamble-like projects.

A system in which banks hold only a portion of their deposits as reserves and lend out the rest, allowing the banking system as a whole to create deposit money.

The minimum fraction of specified deposits that a depository institution must hold as reserves, either as vault cash or balances at the central bank.

Reserves held by a bank above the level regulators require, which the bank can lend or invest and which influence its ability to expand deposits.

The ratio showing how much the money supply can expand for each unit increase in the monetary base, commonly approximated as one divided by the reserve ratio.

The total of currency in circulation outside the central bank plus depository institution reserves held at the central bank, also called high-powered money.

The central bank's buying and selling of government securities in the open market, the most frequently used tool for adjusting bank reserves and short-term interest rates.

The interest rate a central bank charges depository institutions that borrow reserves directly from its lending facility, often set above the market rate to discourage routine use.

The interest rate banks charge one another for overnight loans of reserve balances held at the Federal Reserve, serving as a key target of monetary policy.

The Federal Reserve body that sets the target for the federal funds rate and directs open market operations, meeting several times a year to review economic conditions.

The statutory charge to the Federal Reserve to pursue both maximum employment and price stability, balancing labor market conditions against inflation control.

A policy framework in which a central bank publicly announces a numerical inflation goal and uses interest rate tools to steer actual inflation toward that target.

The idea, summarized by the equation of exchange, that the price level moves in proportion to the money supply when velocity and real output are stable.

The average number of times a unit of currency is used to buy final goods and services during a period, linking the money stock to nominal spending.

Financing government borrowing by creating new central bank money, often through purchases of public debt, which can fuel inflation if sustained.

The reduction in private investment that occurs when government borrowing raises interest rates and absorbs funds that would otherwise finance business capital spending.

The price of one country's currency expressed in units of another currency, determined in foreign exchange markets by trade, capital flows, and policy.

A rise in the value of a currency relative to another, which makes foreign goods cheaper for domestic buyers and domestic exports more expensive abroad.

A fall in the value of a currency relative to another, which raises the domestic price of imports and can improve export competitiveness.

The theory that exchange rates should adjust so that identical baskets of goods cost the same across countries, implying exchange rates track relative price levels.

A systematic record of all economic transactions between residents of a country and the rest of the world, covering trade in goods, services, income, and financial flows.

A government-backed guarantee that protects depositors up to a stated limit if their bank fails, intended to prevent runs and reduce contagion.

A situation in which many depositors simultaneously withdraw funds because they fear the institution will fail, potentially making that failure a self-fulfilling outcome.

The central bank's role of supplying liquidity to solvent but temporarily illiquid banks during a panic, aiming to stop contagion and preserve confidence.

The requirement that a bank hold a minimum amount of equity capital relative to risk-weighted assets so that losses are absorbed without endangering depositors.

A bank's capital divided by its total assets, used as a simple backstop measure of solvency that does not depend on risk weights.