Chapter 11 Flashcards
What are the 3 functions of money?
Medium of exchange
Store of value
Unit of account
What is a medium of exchange?
When you give something in exchange for another, such as money
What is a store of value?
It is when you save something to be used later
What is a unit of account?
It is when we measure something’s value
What is metallic money?
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
Why could coins not always be taken at their face value?
Because consumers could debase their coinage which would drive un-debased money out of circulation
What is Gresham’s law?
The idea that debased money drive un-debased money out of circulation
How did paper money come to be invented?
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
Who issues paper money?
Banks do
Which banks are permitted by law to issue currency?
Central branks
What is fiat money?
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
Money held by the public in the form of deposits with commercial banks is called…
Deposit money
Are bank deposits considered to be money?
Yes
How do banks create money?
By issuing more promises to pay (deposits) than they have cash reserves available to pay out
What is another form of modern money?
Cryptocurrencies
What are the 2 types of institutions that make up a modern banking system?
Central Bank
Financial intermediaries
What is the central bank?
It is the banker to the commercial banking system and to the government
It is the sole money-issuing authority
What do commercial banks refer to?
They refer to financial intermediaries that are deposit accepting and loan granting
What system is known as joint responsibility?
When a central bank has considerable autonomy but its ultimate responsibility for its actions rests with the government
What are the basic functions of the Bank of Canada?
Banker to commercial banks
Banker to the federal government
Regulator of the money supply
What is a commercial bank?
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
What do commercial banks do?
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
What is the fractional-reserve system?
It is when commercial banks keep only a fraction of their deposits in cash or on deposit with the central bank
What is the reserve ration?
It is the fraction of its deposits that it holds as reserves
What is the target reserve ration?
It is a fraction of the deposits of a bank that it would ideally like to hold as reserves
What are excess reserves?
They are reserves in excess of the target level of reserves
What lies at the core of any commercial banking system?
Confidence and risk
What are the assumptions that we make about money creation by the banking system?
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
What is the equation for the reserve ration?
Reserves/deposits = reserve ration
What do excess reserves become?
They become loanable money
What does the total amount of a new deposit in the banking system equal to?
1/reserve ratio (in decimal form) x new deposit
What does Δdeposits equal to with no cash drain from the banking system?
Δdeposits = Δreserves/v (reserve ration in decimal form)
If commercial banks must choose to lend their excess reserves what happens if they do not make this decision?
There will be no deposit expansion
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?
Any multiple expansion of bank deposits will be accompanied by a cash drain
What is Δdeposits equal to with the ratio of cash deposits that people want to maintain (c)?
Δdeposits = (new cash deposit)/(c+v)
What is the money supply?
It is the total quantity of money that is in the economy at any time
What is money supply equal to?
Money supply = Currency + Bank deposits
What are the 5 kinds of deposits?
Demand deposits
Savings deposits
Term deposit
Money market mutual funds
Money market deposit accounts
What is a term deposit?
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
What are the 2 commonly used measures of money in Canada?
M2 and M2+
What is M2?
It is the currency plus demand and notice deposits at the chartered banks
What is M2+?
It is M2 plus similar deposits at other financial institutions
What is M1?
It is currency + demand deposits (checkable deposits)
What is near money?
It is liquid assets that are easily convertible to money without risk of significant loss of value
What can near money be used as?
It can be used as short-term stores of value but are not themselves media of exchange
Term deposits are an example of this
What is a money substitute?
It is something that servers as a medium of exchange but is not a store of value
Ex: credit card
