Ch 4 - The supply of money Flashcards
What is the main service of a bank?
Collection of funds from those who wish to save and lending of funds to those who wish to borrow
Why do financial intermediaries exist?
Economies of scale in transactions and information, insurance, maturity transformation
What is base money ( high powered money) ?
The monetary liabilities of the CB that consists of notes and coins, and the deposits and reserves of banks with the CB
The money multiplier depends on _____
Currency deposit ratio, reserve deposit ratio
If the pop is risk averse, or if there’s a certain shock/uncertainty the currency deposit ratio will be _____
High
If the CB increases the SRR, the reserve deposit ratio will _________
Increase
What are reserves?
Bank keep a fraction of their assets in liquid form in order to meet day to day needs of depositors who withdraw the funds
A local money lender may have a more ________ knowledge of the customers as opposed to a financial intermediary
Intimate
How do banks provide insurance services?
By guaranteeing a rate of return to depositors even if loans made to borrowers turn bad. Thus, depositors can protect themselves from the default risk and obtain higher utility
What is maturity transformation?
Issuing one form of debt that is illiquid while taking on another which is of short maturity
Base money/ H =
Notes and coins (C) + Deposits and reserves of commercial banks in CB (R)
M=
D + C
Total money supply ( M) =
Base money (H) x money multiplier
Supply of deposits is a negative function of the _______ and a positive function of the _____
Mkt int rate, int rate paid on deposits
Demand for loans is a positive function of the _______ and a negative function of _______
Mkt int rate, int rate charged on loans
