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Economics > Chapter 10 - The Monetary System > Flashcards

Chapter 10 - The Monetary System Flashcards

1
Q

Trade is important b/c w/o it we would require… which is…

A

bartering which is the exchange of one good/service for another.

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2
Q

This would force a …. which is…

A

Double coincidence of wants which is when two ppl have a G/S that the other wants.

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3
Q

Money is…

A

a set of assets that ppl use to buy G/S from others.

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4
Q

Money has three functions…

A
  1. Medium of exchange
  2. Unit of Account
  3. Store of Value
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5
Q

Medium of Exchange function is…

A

item given to purchase G/S

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6
Q

unit of Account function is…

A

a yardstick to post prices and record debts.

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7
Q

Store of Value function is…

A

item used to transfer purchasing power from present to future.

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8
Q

2 Types of Money are… example…

A
  1. Commodity Money - intrinsic value (eg. gold coins)

2. Fiat Money - w/o intrinsic value (eg. Canadian currency)

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9
Q

Money Supply is…

A

Q available in the economy.

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10
Q

What assets count toward Money Supply? (2)

A
  1. Currency - paper/coins in non-bank public

2. D. deposits - balance in accounts (accessed on demand)

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11
Q

A Central Bank is… example in Canada…

A

institution to regulate Money Supply in economy.

…Bank of Canada.

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12
Q

4 functions of a central bank is to…

A
  1. Issue Currency 2. Banker to Commercial Banks

3. Banker to Canadian Gov’t 4. Control Money Supply

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13
Q

Central Banks control the Money Supply by the…

A

inflation on the banking system.

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14
Q

If no banking system and the public holds $100, how much is in the Money Supply?

A

$100.

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15
Q

if 100% Reserve Banking System and the public deposits $100 in the bank, how much is in the Money Supply?
How much of an effect do banks have in this system?

A

$100 b/c Money Supply = currency + deposits = 100+0

-banks have no effect in this system

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16
Q

Reserve Ration (R) is…

A

total reserve as % of total deposits.

17
Q

In a fractional reserve banking system…

A

banks keep a fraction as reserves and use the rest to make loans

18
Q

T-account is…

A

an account statement showing assets (loans/reserves) and liabilities (deposits).

19
Q

If R=10%, and a deposit of $100 is made, how much is in the Money Supply?

A

deposits = $100; loans = $90; Money Supply = currency+deposits
Money Supply = $190

20
Q

A Fractional Reserve Banking System creates wealth and money (t/f)

A

false

21
Q

Suppose you deposit that $90 at a 2nd Nat Bank and take the loan to a 3rd Nat Bank. What is the total Money Supply?

A

T-account 1 - reserves=$9, loans=$81, deposits=$90
T-acc2 - reserves=$8.10, loans=$72.90, deposits=$81
Total Money Supply is $1000

22
Q

Money Multiplier is…

…formula is…

A

amount generated with each reserve dollar
…1/R
…our example: 1/.10 (for 10%) so 100/.10 = $1000

23
Q

Bank of Canada Tools (2)

A
  1. Open Market Operations

2. Changing the Overnight Rate

24
Q

Open Market Operations is when…
buying does ____ selling does___
in the foreign exchange market…
result…

A

central bank buys gov’t bonds from or sells them to the public.

  • buying - incr $ Supply; selling - decr $ Supply.
  • buy + sell foreign currencies
  • incr $ S when buy f-c w/ Can $; decr $ S when sell f-c
25
Q

Changing the Overnight Rate is…

A

when central bank acts as banker to commercial banks

26
Q

Bank Rate is…

A

interest rate charged to commercial banks by the central bank

27
Q

Changing Overnight Rate (details)

A
  • commercial banks pay at bank rate; central bank pays at bank rate minus .5%.
  • commercial banks never pay more than bank rate + never accept less than bank rate minus .5%
28
Q

Overnight Rate is…

A

interest rate on ST loans (about .25% below bank rate)

29
Q

Central Banks can alter the Overnight Rate by…

A

changing the bank rate.

  • higher overnight rate - discourages banks from borrowing reserves.
  • lower overnight rate - reduces Q of reserves (+ $ Supply)
30
Q

The Bank of Canada tools are precise (t/f)

A

false

31
Q

Bank of Canada does not control…

A
  1. Money households choose to hold as deposits

2. Money commercial bankers choose to lend.

Economics (10 decks)

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