Business Glossary

savings account at a financial institution that earns interest but is not legally subject to withdrawal on demand or transfer by check. The depositor can withdraw only by giving notice. A Certificate of Deposit (CD) is a special type of time deposit. Should the CD depositor wish to withdraw funds prior to the date of maturity, the financial institution imposes a substantial penalty.

average balance required by a bank for holding credit available. The more or less standard requirement for a bank line of credit, for example, is 10% of the line plus an additional 10% of the borrowings. Compensating balances increase the effective rate of interest on borrowings.

1. draft drawn upon a bank, payable upon demand to the person named upon the draft.
2. to determine an item's accuracy such as by retotaling charges on an invoice or auditing source documents.

interest-bearing transaction account that combines the payable on demand feature of checks and investment feature of savings accounts. A NOW account is functionally an interest paying checking account. The NOW account began in Massachusetts in 1974 when mutual savings banks offered interest bearing transaction accounts (NOW accounts) to compete with commercial banks. These accounts, which paid a rate of interest equivalent to that of passbook accounts (5l/2%), were authorized nationwide for all depository institutions by the 1980 Monetary Control Act.

transaction account combining features of the Negotiable Order Of Withdrawal (NOW) Account and the Money Market Deposit Account (MMDA). Authorized for depository institutions in January 1983, Super NOWs have no interest rate ceilings, but a seven-day withdrawal notice may apply. In addition, they have unlimited deposit and withdrawal capability, but are available only to depositors eligible for NOW accounts, excluding for-profit businesses.

total stock of money in the economy, consisting primarily of (1) currency in circulation and (2) deposits in savings and checking accounts. Too much money in relation to the output of goods tends to push interest rates down and push prices and inflation up; too little money tends to push interest rates up, lower prices and output, and cause unemployment and idle plant capacity. The bulk of money is in demand deposits with commercial banks, which are regulated by the Federal Reserve Board. It manages the money supply by raising or lowering the reserves that banks are required to maintain and the discount rate at which they can borrow from the Fed, as well as by its open-market operations-trading government securities to take money out of the system or put it in.

Changes in the financial system, particularly since banking deregulation in the 1980s, have caused controversy among economists as to what really constitutes the money supply at a given time. In response to this, a more comprehensive analysis and breakdown of money was developed. Essentially, the various forms of money are now grouped into two broad divisions: M-1, M-2, and M-3, representing money and near money; and L, representing longer-term liquid funds. The table on the next page shows a detailed breakdown of all four categories.