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Macroeconomics > Chapter 11 > Flashcards

Chapter 11 Flashcards

1
Q

What are the 3 functions of money?

A

Medium of exchange
Store of value
Unit of account

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2
Q

What is a medium of exchange?

A

When you give something in exchange for another, such as money

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3
Q

What is a store of value?

A

It is when you save something to be used later

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4
Q

What is a unit of account?

A

It is when we measure something’s value

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5
Q

What is metallic money?

A

Before coins it was necessary to carry metals in bulk . However, the invention of coinage meant that it was no longer necessary to weigh metal at each transaction

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6
Q

Why could coins not always be taken at their face value?

A

Because consumers could debase their coinage which would drive un-debased money out of circulation

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7
Q

What is Gresham’s law?

A

The idea that debased money drive un-debased money out of circulation

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8
Q

How did paper money come to be invented?

A

Gold smith’s would hold gold for customers and give them a banknote in exchange so that, when the customer came back, they would know how much gold is in their account. These paper receipts would then be used for purchase, leading to the invention of paper money

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9
Q

Who issues paper money?

A

Banks do

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10
Q

Which banks are permitted by law to issue currency?

A

Central branks

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11
Q

What is fiat money?

A

It is paper money or coinage that is not backed by nor convertible into anything else that has value because it is “legal tender” by government decree

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12
Q

Money held by the public in the form of deposits with commercial banks is called…

A

Deposit money

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13
Q

Are bank deposits considered to be money?

A

Yes

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14
Q

How do banks create money?

A

By issuing more promises to pay (deposits) than they have cash reserves available to pay out

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15
Q

What is another form of modern money?

A

Cryptocurrencies

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16
Q

What are the 2 types of institutions that make up a modern banking system?

A

Central Bank
Financial intermediaries

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17
Q

What is the central bank?

A

It is the banker to the commercial banking system and to the government
It is the sole money-issuing authority

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18
Q

What do commercial banks refer to?

A

They refer to financial intermediaries that are deposit accepting and loan granting

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19
Q

What system is known as joint responsibility?

A

When a central bank has considerable autonomy but its ultimate responsibility for its actions rests with the government

20
Q

What are the basic functions of the Bank of Canada?

A

Banker to commercial banks
Banker to the federal government
Regulator of the money supply

21
Q

What is a commercial bank?

A

It is a privately owned, profit-seeking institution that provides a variety of financial services, such as accepting deposits from customers and providing loans, mortgages, and other financial products

22
Q

What do commercial banks do?

A

It is the essential intermediary in the credit market
It undertakes interbank activities
Multibank systems make use of a clearing house
Commercial banks also act as profit seekers

23
Q

What is the fractional-reserve system?

A

It is when commercial banks keep only a fraction of their deposits in cash or on deposit with the central bank

24
Q

What is the reserve ration?

A

It is the fraction of its deposits that it holds as reserves

25
Q

What is the target reserve ration?

A

It is a fraction of the deposits of a bank that it would ideally like to hold as reserves

26
Q

What are excess reserves?

A

They are reserves in excess of the target level of reserves

27
Q

What lies at the core of any commercial banking system?

A

Confidence and risk

28
Q

What are the assumptions that we make about money creation by the banking system?

A

We assume that banks can invest in only one kind of asset, loans, and that they have only one kind of deposit
We assume that all banks have the same target reserve ratio, which does not change, and that there is no cash drain from the banking system

29
Q

What is the equation for the reserve ration?

A

Reserves/deposits = reserve ration

30
Q

What do excess reserves become?

A

They become loanable money

31
Q

What does the total amount of a new deposit in the banking system equal to?

A

1/reserve ratio (in decimal form) x new deposit

32
Q

What does Δdeposits equal to with no cash drain from the banking system?

A

Δdeposits = Δreserves/v (reserve ration in decimal form)

33
Q

If commercial banks must choose to lend their excess reserves what happens if they do not make this decision?

A

There will be no deposit expansion

34
Q

If people decide to hold an amount of cash equal to a fixed fraction of their bank deposits what can happen to bank deposit expansion?

A

Any multiple expansion of bank deposits will be accompanied by a cash drain

35
Q

What is Δdeposits equal to with the ratio of cash deposits that people want to maintain (c)?

A

Δdeposits = (new cash deposit)/(c+v)

36
Q

What is the money supply?

A

It is the total quantity of money that is in the economy at any time

37
Q

What is money supply equal to?

A

Money supply = Currency + Bank deposits

38
Q

What are the 5 kinds of deposits?

A

Demand deposits
Savings deposits
Term deposit
Money market mutual funds
Money market deposit accounts

39
Q

What is a term deposit?

A

It is a deposit for a period of time that has a specified withdrawal date with a minimum of 30 days into the future but will pay a reduced interest rate if withdrawn earlier

40
Q

What are the 2 commonly used measures of money in Canada?

A

M2 and M2+

41
Q

What is M2?

A

It is the currency plus demand and notice deposits at the chartered banks

42
Q

What is M2+?

A

It is M2 plus similar deposits at other financial institutions

43
Q

What is M1?

A

It is currency + demand deposits (checkable deposits)

44
Q

What is near money?

A

It is liquid assets that are easily convertible to money without risk of significant loss of value

45
Q

What can near money be used as?

A

It can be used as short-term stores of value but are not themselves media of exchange
Term deposits are an example of this

46
Q

What is a money substitute?

A

It is something that servers as a medium of exchange but is not a store of value
Ex: credit card

Macroeconomics (14 decks)

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