Chapter 10 - Monetary System Flashcards
What is money
The set of assets in the economy that people regularly use to buy g/s from other people
Medium of exchange
An item that buyers give to selling when they want to buy g/s. (Empirical, interval, same difference between each unit, has stored value)
Unit of account
The yardstick people,e use to post prices and record debts
Store of value
An item that people can use to transfer purchasing power from the present to the future
Liquidity and what is most liquid of assets
Described the ease with which an asset can be converted into a medium of exchange
Money is the most liquid of assets
Commodity money vs fiat money
C - money that takes the form of a commodity with intrinsic value (comes from utility and scarcity)
F - money without intrinsic value that is accepted as money bc of government
Money stock
The quantity of money circulating in the economy
Currency vs demand deposits
C - The paper bills and coins in the hands of the public
DD - balances in bank accounts that the depositors can access on demand w check or debit card
What’s a central bank and what is ours
An institution designed to regulate the quantity of money in the economy.
The Bank of Canada (BoC)
4 main functions of the BoC + another function
- Issue currency
Banker to the commercial banks
Banker to the Canadian govt
Control the money supply
+ keep inflation at 2%
Money supply and monetary policy
MS - quantity of money available,e in the economy
MP - setting of the money supply by policymakers in the central bank
What are reserves in banks
Deposits that banks have received but have not loaned out
Fractional-reserve banking and reserve ration
A banking system in which banks hold only a fraction of deposits as reserves
- the fraction of deposits that banks hold as reserves
Know the T-table thing?
- Money multiplier
The amount of money the banking system generates with each dollar it receives
Money multiplier is the reciprocal of the reserve ratio
= 1/R
Bank capital, what BoC does to increase/reduce money supply
The resources a bank owner’s have putinto an institution
To increase money supply, BoC buys bonds from the public
To reduce money supply, BoC sells bonds to the public
Leverage, leverage ratio, and capital requirement
- Borrowing money to make an investment
- The ratio of assets to bank capital
A govt regulation specifying a minimum amount of bank capital
Central banks’ 3 main tools for monetary control
- Changing overnight rate
Open-market operations
Changing reserve requirements
- Changing overnight rate
What’s bank rate and overnight rate
- interest rate charged by BoC on loans to commercial banks
- interest rate on very short-term loans between commercial banks
- Open market operations
What is it, when buying for what
The purchase or sale of govt of Canada bonds by the BoC
To increase money supply, buys bonds from public
To decrease money, supply, sells bonds to public
- Open market operations
Foreign exchange market operations
Purchase or sale of foreign money by the BoC
Problems in controlling money supply
- BoC doesn’t control the amount of money households choose to hold as deposits in banks
- BoC doesn’t control how much money banks choose to lend out
What are the functions of money
Medium of exchange
Unit of account
Store of value
