chap 10 Flashcards
money
set of assets in economy that ppl use to buy g/s
commodity money
form of a commodity w INTRINSIC VALUE
i.e. cows, candy bars
fiat money
money WITHOUT intrinsic value that’s accepted as money
i.e. bitcoin
barter
direct exchange of goods for other goods
costly and inefficient in nature
double coincidence of needs
each party wants what the other has i.e. to trade candy for phone, must find someone with item willing to trade
necessary for barter, why it’s inefficient
functions of money
- medium of exchange - buy g/s
- unit of account - simplify price comparisons
- store of value - item ppl can use to transfer purchasing power from present to future (i.e. use when needed)
wealth
store of value w monetary and non-monetary assets
money supply/money stock
quantity of money circulating in economy
currency
paper bills and coins
demand deposits
balances in bank accounts that depositors can access via cheques or debit cards
(funds in bank)
central bank
institute that regulates quantity of money in economy
BoC
2 definitions of money supply
M1+: narrow definition that excludes savings accounts
M2: broad, includes savings
M1+ formula
M1+ = currency in circulation + demand deposits (chequing)
M2 formula
M2 = currency in circulation + demand deposits (chequing) + nonpersonal demand and notice deposits
bank of canada
managed by board of directors w GOVERNOR
originally operated on gold standard, changed during great depression
4 functions BoC
- issue currency
- banker to unchartered banks
- banker to federal gov
- control money supply
monetary policy
setting of money supply by policy makers in BoC
reserves
deposits that banks have received but not loaned out
aka money held in bank
ASSET
100 percent reserve banking
when all deposits (liabilities) received by the bank are held as reserves, NONE loaned out
banks don’t influence money supply
assets = liabilities / reserves = deposits
fractional reserve banking
banks only hold a fraction of deposits as reserves, loan rest out
CREATES MONEY since some becomes CURRENCY
reserve ratio
the fraction of deposits that are held as reserves i.e. 10%
expressed as R
money multiplier
amount of money the banking system generates w every dollar it receives
reciprocal of R:
money mult = 1/R
what happens to money mult when R is large
the higher R, the smaller multiplier
because FEWER deposits are loaned out, makes less money
open-market operations
purchase or sale of government of Canada bonds by BoC
what does boc do to INC money suppy
buys/sells bonds to the public
- issues cheque from boc
- when person deposits to chequing account, boc inc reserves
- inc reserves leads to inc loans, inc money supply
what does boc do to DEC money supply
sell bonds to the public (???)
google says maintaining more reserves and decreasing loans decreases the money supply
loans = inc money supply (put into circulation)
quantitative easing
purchase and sale by central bank of nongov/gov securities with long maturity terms
increases money supply
bank rate
interest rate charged by boc on loans to commercial banks
overnight rate
interest rate on short-term loans B/W commercial banks
always 1/4 % below bank rate
what happens when overnight rates incs
dec borrowing reserves from boc, because bank rate inc
dec reserves, dec money supply (less to loan)
reserve requirements
regulations on minimum amount of reserves banks must have against deposits
if inc reserve requirements:
- # reserves up
- loan less deposits
- inc R, dec money multiplier
- dec money supply
