Key Terms

asset: item of value that a firm or an individual owns

asset–liability time mismatch: customers can withdraw a bank’s liabilities in the short term while customers repay its assets in the long term

balance sheet: an accounting tool that lists assets and liabilities

bank capital: a bank’s net worth

barter: literally, trading one good or service for another, without using money

coins and currency in circulation: the coins and bills that circulate in an economy that are not held by the U.S Treasury, at the Federal Reserve Bank, or in bank vaults

commodity money: an item that is used as money, but which also has value from its use as something other than money

commodity-backed currencies: dollar bills or other currencies with values backed up by gold or another commodity

credit card: immediately transfers money from the credit card company’s checking account to the seller, and at the end of the month the user owes the money to the credit card company; a credit card is a short-term loan

debit card: like a check, is an instruction to the user’s bank to transfer money directly and immediately from your bank account to the seller

demand deposit: checkable deposit in banks that is available by making a cash withdrawal or writing a check

depository institution: institution that accepts money deposits and then uses these to make loans

diversify: making loans or investments with a variety of firms, to reduce the risk of being adversely affected by events at one or a few firms

double coincidence of wants: a situation in which two people each want some good or service that the other person can provide

fiat money: has no intrinsic value, but is declared by a government to be the country’s legal tender

financial intermediary: an institution that operates between a saver with financial assets to invest and an entity who will borrow those assets and pay a rate of return

liability: any amount or debt that a firm or an individual owes

M1 money supply: a narrow definition of the money supply that includes currency and checking accounts in banks, and to a lesser degree, traveler’s checks.

M2 money supply: a definition of the money supply that includes everything in M1, but also adds savings deposits, money market funds, and certificates of deposit

medium of exchange: whatever is widely accepted as a method of payment

money: whatever serves society in four functions: as a medium of exchange, a store of value, a unit of account, and a standard of deferred payment.

money market fund: the deposits of many investors are pooled together and invested in a safe way like short-term government bonds

money multiplier formula: total money in the economy divided by the original quantity of money, or change in the total money in the economy divided by a change in the original quantity of money

net worth: the excess of the asset value over and above the amount of the liability; total assets minus total liabilities

payment system: helps an economy exchange goods and services for money or other financial assets

reserves: funds that a bank keeps on hand and that it does not loan out or invest in bonds

savings deposit: bank account where you cannot withdraw money by writing a check, but can withdraw the money at a bank—or can transfer it easily to a checking account

smart card: stores a certain value of money on a card and then one can use the card to make purchases

standard of deferred payment: money must also be acceptable to make purchases today that will be paid in the future

store of value: something that serves as a way of preserving economic value that one can spend or consume in the future

T-account: a balance sheet with a two-column format, with the T-shape formed by the vertical line down the middle and the horizontal line under the column headings for “Assets” and “Liabilities”

time deposit: account that the depositor has committed to leaving in the bank for a certain period of time, in exchange for a higher rate of interest; also called certificate of deposit

transaction costs: the costs associated with finding a lender or a borrower for money

unit of account: the common way in which we measure market values in an economy

Access for free at https://openstax.org/books/principles-economics-3e