Chapter 10 - The Monetary System Flashcards
Trade is important b/c w/o it we would require… which is…
bartering which is the exchange of one good/service for another.
This would force a …. which is…
Double coincidence of wants which is when two ppl have a G/S that the other wants.
Money is…
a set of assets that ppl use to buy G/S from others.
Money has three functions…
- Medium of exchange
- Unit of Account
- Store of Value
Medium of Exchange function is…
item given to purchase G/S
unit of Account function is…
a yardstick to post prices and record debts.
Store of Value function is…
item used to transfer purchasing power from present to future.
2 Types of Money are… example…
- Commodity Money - intrinsic value (eg. gold coins)
2. Fiat Money - w/o intrinsic value (eg. Canadian currency)
Money Supply is…
Q available in the economy.
What assets count toward Money Supply? (2)
- Currency - paper/coins in non-bank public
2. D. deposits - balance in accounts (accessed on demand)
A Central Bank is… example in Canada…
institution to regulate Money Supply in economy.
…Bank of Canada.
4 functions of a central bank is to…
- Issue Currency 2. Banker to Commercial Banks
3. Banker to Canadian Gov’t 4. Control Money Supply
Central Banks control the Money Supply by the…
inflation on the banking system.
If no banking system and the public holds $100, how much is in the Money Supply?
$100.
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?
$100 b/c Money Supply = currency + deposits = 100+0
-banks have no effect in this system
Reserve Ration (R) is…
total reserve as % of total deposits.
In a fractional reserve banking system…
banks keep a fraction as reserves and use the rest to make loans
T-account is…
an account statement showing assets (loans/reserves) and liabilities (deposits).
If R=10%, and a deposit of $100 is made, how much is in the Money Supply?
deposits = $100; loans = $90; Money Supply = currency+deposits
Money Supply = $190
A Fractional Reserve Banking System creates wealth and money (t/f)
false
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?
T-account 1 - reserves=$9, loans=$81, deposits=$90
T-acc2 - reserves=$8.10, loans=$72.90, deposits=$81
Total Money Supply is $1000
Money Multiplier is…
…formula is…
amount generated with each reserve dollar
…1/R
…our example: 1/.10 (for 10%) so 100/.10 = $1000
Bank of Canada Tools (2)
- Open Market Operations
2. Changing the Overnight Rate
Open Market Operations is when…
buying does ____ selling does___
in the foreign exchange market…
result…
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
Changing the Overnight Rate is…
when central bank acts as banker to commercial banks
Bank Rate is…
interest rate charged to commercial banks by the central bank
Changing Overnight Rate (details)
- 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%
Overnight Rate is…
interest rate on ST loans (about .25% below bank rate)
Central Banks can alter the Overnight Rate by…
changing the bank rate.
- higher overnight rate - discourages banks from borrowing reserves.
- lower overnight rate - reduces Q of reserves (+ $ Supply)
The Bank of Canada tools are precise (t/f)
false
Bank of Canada does not control…
- Money households choose to hold as deposits
2. Money commercial bankers choose to lend.
