Chapter 10 Flashcards
What are the 3 functions of money?
- medium of exchange
- unit of account (used to post prices & record debts)
- store of value (transfer purchasing power)
What does liquidity mean in terms of money?
the ease with which an asset can be converted into the economy’s medium of exchange - money is the most liquid
What is commodity money?
money that would have value even if it were not used as money; has intrinsic value– gold, cigarettes
What is fiat money?
money without intrinsic value that is used as money because of government decree– paper bills
What is currency?
the paper bills and coins in the hands of the public plus personal cheques and debit cards (demand deposits)
What are the 4 jobs of the Bank of Canada?
- issue currency
- act as a banker to commercial banks
- act as a banker to the Canadian government
- controls the quantity of money supply
What is monetary policy?
the setting of the money supply by policy makers in the central bank
What is fractional reserve banking? What is a reserve ratio?
a banking system in which banks only hold a fraction of deposits as reserves
the fraction of deposits that banks hold as reserves
eg. RR= 10%
What is fractional reserve banking? What is a reserve ratio?
a banking system in which banks only hold a fraction of deposits as reserves
the fraction of deposits that banks hold as reserves
eg. RR= 10% therefore for every $100 deposited, $10 is held in reserves and the other $90 is loaned out
What is the money multiplier?
the amount of money the banking system generates with each dollar of reserves; the recipricol of the reserve ration
eg. if RR = 10% - 1/10 so MM = 10
The higher the reserve ratio, the less of each deposit banks loan out and the smaller the money mulitplier
RR = 5% - 1/20 -- MM = 20 RR = 20% - 1/5 -- MM = 5
What is bank capital?
the resources a bank’s owners have put into the institution (issuing equity)
What is leverage?
the use of borrowed money to supplement existing funds for purposes of investment
What is a leverage ratio?
ratio of assets to bank capital
eg. $1000 total assets / $50 bank capital OR 20
every $1 of capital the bank has $20 of assets
What are the 3 methods the BofC uses for controlling money supply?
- changing the overnight rate
- open market operations
- changing reserve requirements
What is a the bank rate?
the interest charged by the BofC on loans to the commercial banks
What is the overnight rate?
the interest rate on very short term loans between commercial banks
Increase the overnight rate
reduce the quantity of reserves in the banking system which reduces money supply
what are open market operations?
the purchase or sale of GofC bonds by the BofC
what are open market operations?
the purchase or sale of GofC bonds by the BofC
Purchase if GofC bonds by the BofC
increase of money supply b/c BofC puts money in the bank to purchase them
What is sterilization?
the process of offsetting foreign exchange market operations (purchase and sale of foreign money by BofC) with open market operations (purchase and sale of governemnt bonds) so that the effect of the money supply is cancelled out
What are reserve requirements?
regulations on the minimum amount of reserves that banks must hold against deposits
increase reserve requirements
less to loan out, so decrease money supply, raises the reserve ratio, decreases the money multiplier
