chap 10

Question 1

money

Answer 1

set of assets in economy that ppl use to buy g/s

Question 2

commodity money

Answer 2

form of a commodity w INTRINSIC VALUE

i.e. cows, candy bars

Question 3

fiat money

Answer 3

money WITHOUT intrinsic value that’s accepted as money

i.e. bitcoin

Question 4

barter

Answer 4

direct exchange of goods for other goods

costly and inefficient in nature

Question 5

double coincidence of needs

Answer 5

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

Question 6

functions of money

Answer 6

1. medium of exchange - buy g/s
2. unit of account - simplify price comparisons
3. store of value - item ppl can use to transfer purchasing power from present to future (i.e. use when needed)

Question 7

wealth

Answer 7

store of value w monetary and non-monetary assets

Question 8

money supply/money stock

Answer 8

quantity of money circulating in economy

Question 9

currency

Answer 9

paper bills and coins

Question 10

demand deposits

Answer 10

balances in bank accounts that depositors can access via cheques or debit cards

(funds in bank)

Question 11

central bank

Answer 11

institute that regulates quantity of money in economy

BoC

Question 12

2 definitions of money supply

Answer 12

M1+: narrow definition that excludes savings accounts

M2: broad, includes savings

Question 13

M1+ formula

Answer 13

M1+ = currency in circulation + demand deposits (chequing)

Question 14

M2 formula

Answer 14

M2 = currency in circulation + demand deposits (chequing) + nonpersonal demand and notice deposits

Question 15

bank of canada

Answer 15

managed by board of directors w GOVERNOR

originally operated on gold standard, changed during great depression

Question 16

4 functions BoC

Answer 16

1. issue currency
2. banker to unchartered banks
3. banker to federal gov
4. control money supply

Question 17

monetary policy

Answer 17

setting of money supply by policy makers in BoC

Question 18

reserves

Answer 18

deposits that banks have received but not loaned out

aka money held in bank

ASSET

Question 19

100 percent reserve banking

Answer 19

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

Question 20

fractional reserve banking

Answer 20

banks only hold a fraction of deposits as reserves, loan rest out

CREATES MONEY since some becomes CURRENCY

Question 21

reserve ratio

Answer 21

the fraction of deposits that are held as reserves i.e. 10%

expressed as R

Question 22

money multiplier

Answer 22

amount of money the banking system generates w every dollar it receives

reciprocal of R:

money mult = 1/R

Question 23

what happens to money mult when R is large

Answer 23

the higher R, the smaller multiplier

because FEWER deposits are loaned out, makes less money

Question 24

open-market operations

Answer 24

purchase or sale of government of Canada bonds by BoC

Question 25

what does boc do to INC money suppy

Answer 25

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

Question 26

what does boc do to DEC money supply

Answer 26

sell bonds to the public (???)

google says maintaining more reserves and decreasing loans decreases the money supply

loans = inc money supply (put into circulation)

Question 27

quantitative easing

Answer 27

purchase and sale by central bank of nongov/gov securities with long maturity terms

increases money supply

Question 28

bank rate

Answer 28

interest rate charged by boc on loans to commercial banks

Question 29

overnight rate

Answer 29

interest rate on short-term loans B/W commercial banks

always 1/4 % below bank rate

Question 30

what happens when overnight rates incs

Answer 30

dec borrowing reserves from boc, because bank rate inc

dec reserves, dec money supply (less to loan)

Question 31

reserve requirements

Answer 31

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