Chapter 11 Flashcards
Money
Anything that is generally accepted in exchanging goods and services.
Barter system
Direct exchange of one good for another, it collapsed due to high transaction cost
Double coincidence of wants
it takes a long time to find someone who has what you want and who wants what you have
Medium of Exchange
Facilitate exchange of goods and services
Unit of account
Used to measure values
Store of Value
Store purchasing power for future use, is not a good store of value because it loses value due to inflation
Mean of deferred payments
used to pay for debts.
Gold Standard
In the past money was backed by a reserve of gold. Central banks must keep a reserve of gold equal to the paper notes they issue and any one can convert paper notes into gold.
New Legal Tender
Nowadays money is no longer backed by gold it becomes legal tender “fiat money” guaranteed by the government that it will be accepted for payments.
Measuring money supply (M2)
Currency + Demand and saving deposit in charted banks (commercial accept deposits and give loans)
Currency
coins and paper notes in circluation
Demand Desposits
Checking accounts access money on demand whenever you want, you can write cheques on it.
Saving deposits
cannot be used directly to make payments. They earn higher interest early withdrawals are penalized. Cannot write cheques on them.
M2+
M2 + Deposits at other financial institutions “noncharted banks” = (M2+)
Types of Noncharted Banks (+) from M2+
- Trust Companies : Accept deposits and invest for you
- Mortgage and Loan Companies
- Credit Union : group of people who borrow and lend from each other
- Caisse Populaives : credit unions in Quebec.
Benefits of demand deposits
They do the same job as cash and:
Safety of transations : don’t worry if you lost debt card or check
Lower Transaction cost :don’t have to go to bamk to withdraw cash
Transaction record : history of all transactions.
Credit Card
Not money, it is a money substitute
Liquidity
how easy and quick to convert an asset into cash
Cash money
important liquid asset
Fractional Reserve System
In some countries commercial banks are required by law to keep a fraction of their deposits as reserve cash so they can pay anyone who wants to withdraw from their account. Here in Canada, it is not compulsory but commercial banks keep some cash voluntarily.
Intermediare
Middle man between savers and the borrowers.
Borrowers “Investers”
Gain loans from commercal banks and have a high interest rates
Savers “depositors”
Deposit from commercial banks and pay low interest.
Liabilities and capital
Deposits: money of depositors
Capital: money of owners and bank stock holders
Assets
Reserve “cash”
Loans
building
other assets
Reserve ratio
percentage of deposits that banks keep as cash
Deposit creation process
The initial deposit that was put in the bank will create a sequence of deposits whose sum is multiple amounts of the initial deposit. (peep graph)
Money multiplier
measures by how many times money supply changes due to the change in deposits
