The Financial Sector

• money


  Any item that is generally acceptable to sellers in exchange for goods and services.
• money supply


  The amount of monetary assets in the economy at any time.
• standard of value (unit of account)


  a nominal monetary unit of measure or currency used to value/cost goods, services, assets, liabilities, income, expenses; i.e., any economic item. It is one of three well-known functions of money.
• medium of exchange


  Any item sellers generally accept and

  buyers generally use to pay for a good or service; money; a convenient means of exchanging goods and services without engaging in barter .
• store of value


  An asset set aside for future use; one of the three

  functions of money.
• M1


  The most narrowly defined money supply, equal to currency in the hands of the public and the checkable deposits of commercial banks and thrift institutions.
• M2


  A more broadly defined money supply, equal to M 1 plus noncheckable savings accounts (including money market deposit accounts ),

  small time deposits (deposits of less than $100,000), and individual money market mutual fund balances.
• M3


  A measure of money supply that includes M2 as well as large time deposits, institutional money market funds, short-term repurchase agreements and other larger liquid assets. The M3 measurement includes assets that are less liquid than other components of the money supply, and are more closely related to the finances of larger financial institutions and corporations than to those of businesses and individuals.
• checkable deposits


  Any deposit in a commercial bank or thrift institution against which a check may be written.
• transaction demand for money

  The amount of money people

  want to hold for use as a medium of exchange (to make payments); varies directly with the nominal GDP .
• precautionary demand for money


  the demand for financial assets, such as securities, money or foreign currency; it is money people hold in case of emergency.
• asset demand for money

  The amount of money people want to

  hold as a store of value; this amount varies inversely with the interest rate .
• asset


  Anything of monetary value owned by a firm or individual.
• stock


  An ownership share in a corporation.
• bond


  A financial device through which a borrower (a firm or government) is obligated to pay the principal and interest on a loan at a specific date in the future.
• securities


  A financial instrument that represents an ownership position in a publicly-traded corporation (stock), a creditor relationship with governmental body or a corporation (bond), or rights to ownership as represented by an option.
• velocity of money


  The number of times per year that the average dollar in the money supply is spent for final goods and services; nominal GDP divided by the money supply.
• demand deposit


  Funds held in an account from which deposited funds can be withdrawn at any time without any advance notice to the depository institution. Demand deposits can be "demanded" by an account holder at any time. Many checking and savings accounts today are demand deposits and are accessible by the account holder through a variety of banking options, including teller, ATM and online banking.
• time (term) deposit


  An interest-earning deposit in a commercial bank

  or thrift institution that the depositor can withdraw without penalty after the end of a specified period.
• near money


  An economics term describing non-cash assets that are highly liquid, such as bank deposits, certificates of deposit (CDs) and Treasury Bills. Central banks, economists and statisticians may utilize near money when determining the current money supply. Near money refers to assets that can be quickly converted into cash. Also called quasi-money.
• commercial bank


  A firm that engages in the business of banking

  (accepts deposits, offers checking accounts, and makes loans).
• fractional reserve banking system


  A reserve requirement that is less than 100 percent of the checkable-deposit liabilities of a commercial

  bank.
• bank reserves


  The deposits of commercial banks at

  Federal Reserve Banks plus bank vault cash .
• excess reserves


  The amount by which a bank's actual reserves exceed its required reserves; actual reserves minus required reserves.
• reserve requirement


  The funds that banks must deposit with the Federal Reserve Bank (or hold as vault cash ) to meet the

  legal reserve requirement; a fixed percentage of the bank's or thrift's checkable deposits.
• money multiplier


  The multiple of its excess reserves by which

  the banking system can expand checkable deposits and thus the money supply by making new loans (or buying securities); equal to 1 divided by the reserve requirement .
• The Federal Reserve (The Fed)


  the central banking system of the United States
• open market operations


  The buying and selling of U.S. government

  securities by the Federal Reserve Banks for purposes of carrying out monetary policy .
• discount rate


  The interest rate that the Federal Reserve Banks

  charge on the loans they make to commercial banks and thrift institutions.
• expansionary monetary policy


  Seeks to increase the size of the money supply to achieve economic growth by increase of economic activity.
• contractionary monetary policy


  A decrease in the quantity of money in circulation for the expressed purpose of putting the brakes on an overheated business-cycle expansion and to address the problem of inflation.
• federal funds rate


  The interest rate banks and other depository

  institutions charge one another on overnight loans made out of their excess reserves .
• legal tender


  A legal designation of a nation's official currency

  (bills and coins). Payment of debts must be accepted in this monetary unit, but creditors can specify the form of payment, for example, "cash only" or "check or credit card only."
• real interest rate


  The interest rate expressed in dollars of constant

  value (adjusted for inflation ) and equal to the nominal interest rate less the expected rate of inflation.
• nominal interest rate


  The interest rate expressed in terms of

  annual amounts currently charged for interest and not adjusted for inflation.
• balance sheet


  A statement of the assets, liabilities, and net worth

  of a firm or individual at some given time.
• liability


  A debt with a monetary value; an amount owed by a

  firm or an individual.
• net worth


  The total assets less the total liabilities of a firm or an individual; for a firm, the claims of the owners against the firm's total assets; for an individual, his or her wealth.
• T-account


  A simplified balance sheet showing assets and liabilities. (refer to the image provided)

  
• time (term) deposit


  An interest-earning deposit in a commercial bank

  or thrift institution that the depositor can withdraw without penalty after the end of a specified period.