Chapter 10-11 Flashcards
What is money?
Anything that is readily, widely available and acceptable as a medium of exchange for goods/services
eliminates double coincidence of wants
What are criteria for determining money?
Had to be portable
durable
wont get lost
acceptable
What is a measure of value?
used to establish a measure of money
a yardstick for valuing goods/services
What is unit of account?
For money:
easy to do math with
can make calculations with it
What is store of wealth?
does not deteriorate Physically
vulnerable to inflation
Is a credit card money?
No, its a loan
a debit card is since it uses the funds in you’re account
What is money supplies?
the total amount of money in the economy
What are the two types of money?
M1- narrowest definition of money- coins, bank notes and demand deposits (money in chequing accounts)
M2- apparently find in the textbook (Commodity money is money that has value apart from its use as money.)
What is the Canadian Banking System made of?
Chartered banks and the central bank called Bank of Canada
Chartered Banks are licensed to provide different services
What does the Office of the Superintendent of Financial Institutions (OSFI) do?
They provide charters to banks and stipulate what they can and can’t do
What is a foreign bank that can force regulations on its members?
Bank of International Settlements
what is the order of regulation in the banking system?
Bank of international settlements
OSFI
Bank of canada
What are the top 6 banks in Canada called?
Schedule A/1 banks
Include services such as: deposit taking, loans, personal financial advice, brokerage services, insurance
What are schedule B/2 banks?
Are smaller scale banks
Limited in their services and locations
what is expansionary and contractionary monetary policies? what is the reason
Expansionary:
Decrease interest rate
Contractual:
Increase interest rate
To change have a stable currency while keeping the economy moving
They implement these policies through the pruchase/ sale of Gov. Canada bonds, which changes the amount of money in the Canadian economy
For better communication what has the bank of Canada done?
Releases policy report/changes
has press conferences
Why is the bank of Canada independent from the government? What are some potential negatives?
Can have longer-run objectives,
avoids political business cycles
No accountability
Hinders coordination of monetary and fiscal policy
What are the 4 phases of the business cycle?
Expansion, peak, contraction (recession), trough
what are the policies that can change the business cycle?
Fiscal:
changing government spending and taxation (G,T)
Monetary:
changing interest rates, through the money supply
How do you label a time, gdp graph?
horizontal is time vertical is real gdp growth, it goes up down
What happens to Unemployment in a recession and interest rates?
Unemployment goes up and interest goes down
What are three reasons for money demand?
Transactional demand for money
-consumer need for day-to-day use
-Business needs money during expansionary faze
Precautionary demand for money
-emergencies
-Retirement
-kids education
-savings for a down payment or vacation
Speculative demand for money
-Relates to a person’s preference to hold money rather than financial assets such as bonds
-increase interest rate leads to Increase on demand for bonds leads to a decrease in money demanded
The interest rate has not changed but the demand for money (money demand curve) has increased why might this happen?
Increased population
Business Expanding (leaving recession)
How come money supplied is vertical in a money market graph?
Money supplied is ran separate from interest rates
Money supply is independent of interest rates
Write a transcription for an expansionary monetary policy
Exp monetary policy: Increase money supplies leads to lower interest rates leads to lower cost of borrowing leads to higher consumption and investment leads to higher real GDP
Write a transcription for a contractionary monetary policy
Con Monetary Policy: Decrease in money supplied leads to increased interest rate leads to increased cost of borrowing leads to a decrease in consumption and investment leads to a decrease in real GDP
During the great depression which group was responsible for bailing out Farmers?
The bank of Canada
How does the Bank of Canada function in relation to the federal government?
The Bank of Canada is completely independent of the federal government
The Bank of Canada’s controls MS (monetary supply), a monetary policy used to regulate inflation
What is the fractional reserve banking system, how does it work, and is it a common system of operation?
A system where a fraction of the deposits are held as reserves.
TR = RR + ER
RR = RRR * Deposits
where:
RRR stands for Reserve Requirement Ratio
TR stands for Total Reserves
ER stands for Excess Reserves
How does the supply of money increase/decrease?
It is based on the required reserve that a bank must have, if a bank has a required reserve ratio of 10% and has $100 in deposits it can loan out $90 and keep the other $10 as reserves, but that money is also a deposit
How does the multiplier work (MM), what is the formula?
It tells you how much new money a deposit can create for example a MM of 5 means that $1 of deposits can create up to $5 of new money
MM = 1/RRR
What factors make/ have made the Bank of Canada dependent
there is a joint responsibility system
Explain the business cycle, use a graph to show demonstrate?
Explain Open Market Operations. How does it work?
Buying and selling government bonds
This can be used to get out of recession (expansionary policy) or in a contractionary policy
How it works: Recession
Bank of Canada gives up money for Canadian bonds, they buy the bonds, and people deposit the money they got from the bonds, the bank would then be put it in the Required Reserves and the rest would be put in Extra Reserves that they can loan out from, this increases the supply of loanable funds creating a supply that is greater than demand which causes a new interest rate
Does the bank of canada lower or raise interest rates?
No, it’s the charter banks, the bank of Canada manipulates the environment forcing charter banks to change interest rates
Explain the Bank of Canada changing the bank rate, how does it work?
The Bank of Canada charges charter banks for borrowing reserve funds from the Bank of Canada, it is the interest rate for this borrowing.
How it works:
the interest rate the Bank of Canada charges for the ‘overnight’ lending to the charter banks which signals what the bank of Canada is planning to do in the economy
They then change the money supplied to justify the interest rate.
MV = PQ what do the variables represent?
How do you change this to growth rates?
M = money supply
V = velocity of money, the amount a dollar exchanges per year
P*Q = nominal GDP
change the variables to delta that variable over said variable
What are the monetarists?
what is their conclusion?
A group formed/ based on Milton Friedman’s Quantity Theory of Money
Views:
- The number of transactions is the same regardless of the business cycle
- Change in the money supply directly affects GDP
- Monetary policy is the best tool to change where you are in the business cycle
What is the Keynesian view? Consider both Velocity of money and government’s role in Macroeconomy
Government has an important role to play in the economic
There is both government investment and government services
- V is uncertain, which in turn means you do not know the impacts of monetary policies
- Fiscal is considered the better policy
Who is right Milton or Keynesian?
Milton, but fiscal policy is still useable just way worse
