Chapter 10 Flashcards
Is Money wealth?
No
Will Money make you better off?
No
Without Money trade would require _____.
Barter
Define: Barter
the exchange of one god or service for another
the unlikely occurrence that two people each ahvea good the other wants is..
double coincidence of wants
Most people have to spend time searching for others to trade with - huge waste of resources. This problem is solved with?
Money
Define Money
the set of assets that people regularly use to buy Goods and services from others.
T or F: Money is recognizable and it’s harder to barter.
False. easier to barter
What are the 3 Functions of Money?
Medium of exchange
Unit of account
Store of value (wealth)
The function of money :an item buyers give to sellers when they want to purchase Goods and services
Medium of exchange
A function of money :an item people can use to transfer purchasing power from the present to the future.
Store of Value
A function of money: the yardstick people use to post prices and record debts. (have a common value)
Unit of account
the 2 kinds of money
Commodity Money
Fiat money
take the form of a commodity with intrinsic value is…
commodity money
fiat money:
money without intrinsic value, used as money because of government decree.
The canadian Dollar is an example of what kind of money?
Fiat money
Gold coins, big macs, cigarettes, are examples of what kind of money?
commodity money
T or F : Money supply == money stalk
True
the quantity of money available in the economy is..
money supply/ money stock
What are the 2 assets that should be considered part of the money supply?
Currency
Demand deposits
Demand deposits
balances in bank accounts that depositors can access on demand by writing a cheque or using a debit card.
paper bills and coins in the hands of the (non-bank) public
currency
contract to pay back a loan
Asset
liquidity
how quickly money flows through the economy
T or F:
Credit –> spend
Debit –> borrow
False;
Credit –> borrow
Debit –> spend
What are the 2 measures of the Money stock for the Canadian economY?
M1, M2
Chequable deposits + currency are what measure of money stock?
M1
Which is more liquid? M1 or M2?
M1
Central Bank: an institution designed to regulate the ____ _____ in the economy.
money supply
Bank of Canada
the central bank of canada
T or F: the bank of Canada prints money
False, must balance their books through interest rates.
T or F: Managed by a board of directors, composed of the governor, the senior deputy governor, and 12 directors, including the minister of Finance.
True
who appoints the bank of canada’s board of directors?
minister of finance
How long is the the term for a governor and a senior deputy governor?
7 years. 3 for other directors
the difference in term lengths creates separation between politics and the bank T or F?
True
What are the 4 primary functions of the Bank of Canada
Issue currency
act as a banker to the commercial banks
act as a banker to the canadian government
control the money supply
money supply is…
quantity of money available in the economy
monetary policy
decisions by policymakers conerning the money supply. (from the bank of canada, for the good of the economy)
Through what does the bank of Canada control the money supply?
commercial Banks
What is the function of a Commercial Bank?
influence the quantity of demand deposits in the economy and the money supply.
what type of bank includes credit unions, caisses populaires, and trust companies?
commercial banks
_______ _______ banking system: banks keep a fraction of deposits as reserves and use the rest to make loans
fractional reserve
fractional reserve banking system is how banks lose money T or F:
False ; make money
Reserves
a fraction of the amount of deposits made. the rest is loaned out.
Reserve ratio, R
= fraction of deposits that banks hold as reserves.
= total reserves as a percentage of total deposits
T or F: government insures M2 money ONLY
M1 money only; False
T- Account
a simplified accounting statement that shows a bank’s assets & liabilities.
a banks liabilities include:
deposits
a banks assets include:
loans and reserves
T or F: banks lend to good credit
True
Suppose $100 is in circulation, and there is No banking system. what is the money supply?
$100
Suppose there is $100 in circulation and there is a 100% reserve banking system. (no loans) what is the money supply?
$100
T or F: A fractional reserve banking system
creates money and wealth
False ; A fractional reserve banking system
creates money, but not wealth.
- companies create the wealth
Define: the amount of money the banking system generates with each dollar of reserves
money multiplier
What is the Formula for the money multiplier?
1/R(reserve ratio)
What are the two tools in the Bank of Canada’s monetary toolbox?
- open-market operations
2. Changing the overnight rate
The Bank of Canada conducts open-market operations when it buys or sells government _____ to the public:
bonds
When the Bank of Canada buys government bonds, money supply will ______
increase
When the Bank of Canada sells government bonds, money supply will ______
decrease
The Bank of Canada conducts foreign exchange market operations when it buys or sells _____ ______.
foreign currencies
The money supply ______ when the Bank of Canada buys foreign currency with Canadian currency.
increases
The money supply ______ when the Bank of Canada sells foreign currency.
decreases
the interest rate charged by the Bank of Canada on loans to the commercial banks:
bank rate
T or F: Central banks like the Bank of Canada act as bankers to the commercial banks.
True
the interest rate on very short- term loans between commercial banks
overnight rate
commercial banks never need to accept less than the bank rate, minus half a percent, when they make short-term loans, because they can always lend to the Bank of Canada instead. T or F?
True
Commercial banks usually need to pay more than the bank rate for short-term loans, because they can’t always borrow from the Bank of Canada.
False;
Commercial banks never need to pay more than the bank rate for short-term loans, because they can always borrow from the Bank of Canada instead.
T or F: A lower overnight rate discourages banks from borrowing reserves from the Bank of Canada.
false; A higher overnight rate discourages banks from borrowing reserves from the Bank of Canada.
T or F: An increase in the overnight rate reduces the quantity of reserves in the banking system, which in turn reduces the money supply.
True
Can the bank of Canada alter the money supply? if so how?
yes, by changing the bank rate and overnight rate indirectly
T or F: The Bank of Canada’s control of the money supply is precise.
False; The Bank of Canada’s control of the money supply is not precise.
what 2 things does the bank of canada not control when it comes to money:
- households choose to hold as deposits in banks
2. commercial bankers choose to lend
Money includes _____ and various types of bank ______.
currencies, deposits
In a fractional reserve banking system, banks create money when they make _____.
loans
The Bank of Canada is what kind of bank?
Central bank
The bank of canada controls the money supply through _____-_____ operations or by changing the ___ ____.
open-market, bank rate
