Question

Define the following

Barter

Liquidity

Commodity money

Fiat money

Financial intermediary

Bank reserves

Fractional reserve system

Required reserves

Excess reserves

Money (deposit) multiplier

Portfolio investment

Leverage

Answer 1

Barter

Under barter, traders exchange goods and services lieu of money as medium of exchange. A bushel of corn is exchanged for a bushel of cotton.

Liquidity

The term liquidity refers to the ease with which an asset or investment can be converted into cash. Example of liquid assets are cash, treasury bills, bonds etc.

Commodity money

Commodity money has value based on the material with which it was manufactured. For example, gold, silver, copper coins.

Fiat money

Fiat money has no intrinsic value. Fiat currency is legal tender whose value is backed by the government that issued it. Examples of fiat money is the U.S. dollar, Euro

Financial intermediary

Financial intermediaries bring the lender and borrower together in the financial market. Examples of financial intermediaries are banks, investment banks, mutual funds,

Bank reserves

It is the reserve held by commercial banks with the central bank of a country, such as the Federal Reserve.