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Education Assessment


Glossary of Terms

Appreciation
An increase in the value or price.a

Asset
Anything an individual or a business owns that has commercial or exchange value.a

Bank note
A term used synonymously with paper money or currency issued by a bank. Notes are, in effect, a promise to pay the bearer on demand the amount stated on the face of the note. Today, only the Federal Reserve Banks are authorized to issue bank notes, i.e., Federal Reserve notes, in the United States.a

Bank run (bank panic)
A series of unexpected cash withdrawals caused by a sudden decline in depositor confidence or fear that the bank will be closed by the chartering agency, i.e. many depositors withdraw cash almost simultaneously. Since the cash reserve a bank keeps on hand is only a small fraction of its deposits, a large number of withdrawals in a short period of time can deplete available cash and force the bank to close and possibly go out of business.a

Capital
In banking, the funds invested in a bank that are available to absorb loan losses or other problems and therefore protect depositors. Capital includes all equity and some types of debt.b

Capital market
The market in which corporate equity and longer-term debt securities (those maturing in more than one year) are issued and traded.b

Central bank
The principal monetary authority of a nation, which performs several key functions, including conducting monetary policy to stabilize the economy and level of prices. The Federal Reserve is the central bank for the United States.b

Collateral
Property that is offered to secure a loan or other credit and that becomes subject to seizure on default. (Also called security) a

Commercial Bank
Bank that offers a variety of deposit accounts, including checking, savings, and time deposits, and extends loans to individuals and businesses. Commercial banks can be contrasted with investment banking firms, which generally are involved in arranging for the sale of corporate or municipal securities, and broker-dealer firms, which buy and sell securities for themselves and others.b

Consumer Advisory Council
A group, created under the Federal Reserve Act, composed of thirty members who represent the interests of a broad range of consumers and creditors. The council meets with the Board of Governors three times a year on matters concerning consumers and the consumer protection laws administered by the Board.b

Credit
The promise to pay in the future in order to buy or borrow in the present. The right to defer payment of debt a

Credit Union
Financial cooperative organization whose membership consists of individuals who have a common bond, such as place of employment or residence or membership in a labor union. Credit unions accept deposits from members, pay interest (in the form of dividends) on the deposits out of earnings, and use their funds mainly to provide consumer installment loans to members.b

Currency appreciation
An increase in the value of one currency relative to another currency. Appreciation occurs when, because of a change in exchange rates, a unit of one currency buys more units of another currency.a

Currency depreciation
A decline in the value of one currency relative to another currency. Depreciation occurs when, because of a change in exchange rates, a unit of one currency buys fewer units of another currency.a

Decentralize
To distribute the administrative functions or powers of a central authority among several local authorities.a

Demand
Describes the behavior of a buyer of a good or service. Demand is given by the relationship between the price of the good and the quantity of the good that buyers are willing to purchase, holding everything else constant.

Depository institution
Financial institution that makes loans and obtains its funds mainly through accepting deposits from the public; includes commercial banks, savings and loan associations, savings banks, and credit unions.a

Deregulation
The act or process of removing restrictions and regulations including government regulation of tariffs, market entry and exit and / or facilities in public services.a

Discount rate
Officially the primary credit rate, it is the interest rate at which an eligible depository institution may borrow funds, typically for a short period, directly from a Federal Reserve Bank. The law requires that the board of directors of each Reserve Bank establish the discount rate every fourteen days, subject to review and determination by the Board of Governors.b

Discount window (the window)
Figurative expression for the Federal Reserve facility that extends credit directly to eligible depository institutions (those subject to reserve requirements); so named because, in the early days of the Federal Reserve System, bankers would come to a Reserve Bank teller window to obtain credit.b

Dividend
A share of profits paid to a stockholder.a

Economic growth
An increase in the nation's capacity to produce goods and services.a

Equilibrium
A situation in which the quantities demanded and supplied in a market are equal. Equilibrium exists when forces that cause changes in the market are in balance so that there is no tendency for the market price to change.a

Exchange rate
The price of a country's currency in terms of another country's currency.a

Federal Advisory Council
Advisory group made up of one representative (in most cases a banker) from each of the twelve Federal Reserve Districts. Established by the Federal Reserve Act, the council meets periodically with the Board of Governors to discuss business and financial conditions and to make recommendations.b

Fiat paper money (or Fiat currency)
Paper currency that has value because the government has decreed that it is a "legal tender" for making tax payments and often for discharging other debts and payments as well. Fiat money does not represent a claim on some other form of money or commodity such as gold and silver.a

Foreign exchange markets
Markets in which foreign currencies are purchased and sold.b

Government securities
Securities issued by the U.S. Treasury or federal agencies.b

Interest
A fee for the use of money over time. It is an expense to the borrower and revenue to the lender. Also money earned on a savings account.a

Lender of last resort
As the nation's central bank, the Federal Reserve has the authority and financial resources to act as "lender of last resort" by extending credit to depository institutions or to other entities in unusual circumstances involving a national or regional emergency, where failure to obtain credit would have a severe adverse impact on the economy.a

Liquidity
Quality that makes an asset easily convertible into cash with relatively little loss of value in the conversion process. Sometimes used more broadly to encompass cash and credit in hand and promises of credit to meet needs for cash.b

M1
Measure of the U.S. money stock that consists of currency held by the public, traveler's checks, demand deposits, and other checkable deposits.b

M2
Measure of the U.S. money stock that consists of M1, savings deposits (including money market deposit accounts), time deposits in amounts of less than $100,000, and balances in retail money market mutual funds. Excludes individual retirement account (IRA) and Keough balances at depository institutions and retail money funds.b

Macroeconomics
The study of economics in terms of whole systems with reference to general levels of output and income and to the interrelations among sectors of the economy. See also microeconomics.a

Mergers
The absorption of an estate, corporation, contract, or an interest in another.a

Microeconomics
The study of economics in terms of individual areas of activity (as a firm, household or prices). See also macroeconomics.a

Monetary policy
A central bank's actions to influence the availability and cost of money and credit, as a means of helping to promote national economic goals. Tools of monetary policy include open market operations, direct lending to depository institutions, and reserve requirements.b

Money supply
Total quantity of money available for transactions and investment; measure of the U.S. stock include M1, M2 and M3. (Also referred to as the money stock or simply money.)a

Portfolio
Collection of loans or assets, classified by type of borrower or asset. For example, a bank's portfolio might include loans, investment securities, and assets managed in trust; the loan portfolio might include commercial, mortgage, and consumer installment loans.b

Profit
The return received on a business undertaking after all operating expenses have been met.a

Real GDP
GDP (gross domestic product) adjusted for inflation. Real GDP provides the value of GDP in constant dollars, which is used as an indicator of the volume of the nation's output.a

Recession
A significant decline in general economic activity extending over a period of time. Usually declared after two consecutive quarters of declining gross domestic products.a

Regulation
A principle, rule, or law designed to control or govern.a

Repurchase agreement (RP or repo)
A transaction in which the Federal Reserve enters into an agreement with a primary dealer to acquire securities from the dealer for a specified principal amount at an agreed-upon interest rate and to return the securities on a specified future date. The maturity date may be the next day or many days later, with the maximum length set by the FOMC. These transactions permit the Federal Reserve to increase the supply of Federal Reserve balances for the length of the agreement.b

Savings Account
A service depository institutions offer whereby people can deposit their money for future use and earn interest.a

Savings Bank
Depository institution historically engaged primarily in accepting consumer savings deposits and in originating and investing in residential mortgage loans; now may offer checking-type deposits and make a wider range of loans.b

Savings and Loan Association (S&L)
Historically, depository institution that accepted deposits mainly from individuals and invested heavily in residential mortgage loans; although still primarily residential lenders, S&Ls now have many of the powers of commercial banks.b

Securities
Paper certificates (definitive securities) or electronic records (book-entry securities) evidencing ownership of equity (stocks) or debt obligations (bonds).b

Short-term interest rates
Interest rates on loan contracts-or debt instruments such as Treasury bills, bank certificates of deposit or commercial paper-having maturities of less than one year. Often called money market rates.a

Sterilization
Foreign exchange intervention operations involving dollars affect the supply of Federal Reserve balances to U.S. depository institutions, unless the Federal Reserve offsets the effect. The Federal Reserve offsets, or "sterilizes," the effects of intervention on Federal Reserve balances through open market operations; otherwise, the intervention could cause the federal funds rate to move away from the target set by the FOMC.b

Supply
Describes the behavior of a seller of a good or service. Supply is given by the relationship between the price of the good and the quantity of the good that sellers are willing to bring to the market for sale, holding everything else constant.

Thrift Institutions Advisory Council
Group established by the Board of Governors to obtain information and opinions on the needs and problems of thrift institutions. Made up of representatives of savings and loan associations, savings banks, and credit unions.b

Treasury
The executive department of a government in charge of the collection, management, and expenditure of the public revenue.a

Unemployment rate
The percentage of the labor force that is unemployed and actively seeking a job.a

Endnotes

a Source: Glossary, FederalReserveEducation.org http://www.federalreserveeducation.org/glossary/ accessed October, 2008
b Source: The Federal Reserve System: Purposes & Functions http://www.federalreserve.gov/pf/pdf/pf_complete.pdf accessed October, 2008.