Chapter 11 Flashcards
one of the earliest services provided by central banks was to be a “lender of last resort”…. what does this mean?
it would provide funds to private banks in urgent need of cash
reserve ratio
the fraction of deposits that banks hold in their vaults or as deposits at the BoC
commercial banks can hold deposits where?
- their vaults
- as deposits at the BoC
responsibility for the BoC’s affairs rests with who?
- governor
- senior deputy governor
- deputy minister of finance
- 12 directors
hyperinflation is when…
the inflation rate exceeds 50% per month
bank panic/”run on the bank”
occurs when many banks experience runs at the same time
monetary policy
the actions the BoC takes to manage the money supply and interest rates in order to pursue economic objectives
when we say that money serves as a unit of account, what do we mean?
prices are quoted in terms of money
money provides a convenient measuring tool when prices for all good and services are quoted inn money terms
money can be used to compare relative value of goods - makes it easier to compare the relative value of goods
Canadian commercial banks hold reserves equal to…
roughly 3% of their deposit liabilities
today, possibility of a bank run has been all but eliminated in Canada by…
the provision of DEPOSIT INSURANCE
by the Canadian Deposit Insurance Corporation (CDIC)
reserve ratio is 25% and banks loan out all of their excess reserves. if a person deposits $100 cash in a bank, chequing account balances will increase by a max of…
$400
(new deposit) (1/v)
3 important functions of the bank of Canada
- to act as a banker to the federal government
- to act as a lender of last resort and banker to the commercial banks
- to regulate the money supply and conduct monetary policy
as a store of value, money is used to…
save for future spending
M2 definition
currency + demand and notice deposits at chartered banks
what’s the most important asset on the balance sheet of a bank?
loans
(loans = typically the bank’s largest asset)
(reserves are also a bank asset but make up a small component of the balance sheet)
business of a bank is to make a profit on…
on the difference between
the INTEREST RECEIVED ON LOANS
and the INTEREST PAID ON DEPOSITS
why are deposits liabilities to a bank?
since it will eventually have to give those funds back to depositors
4 statements on milling
- served to increase the acceptability of coins
- reminds us there were days when market value of metal in a coin was equal to the face value of the coin
- done to prevent people from shaving or clipping a thin slice off the edge of the coin and keeping the valuable metal
- this practise survives on Canadian dimes, quarters, and toonies today
money functions as a unit of account when…
it is used to MEASURE VALUE in the economy
money is used as a medium of exchange when…
it’s used to pay for goods and services
money substitutes serve the function of being a ___ ___ ___ but aren’t a…
medium of exchange
store of value
name of Canada’s banking system
fractional reserve system
Gresham’s law
the idea that “bad” (or debased) money drives “good” (or un-debased) money out of circulation
liquidity
the RELATIVE EASE and SPEED
with which an asset can be CONVERTED into a MEDIUM OF EXCHANGE
without LOSING SIGNIFICANT ECONOMIC VALUE
are credit cards part of the money supply?
no
when you purchase goods and services using a credit card, you’re taking out a short-term loan
M1
- currency in circulation
- demand deposits (or chequable deposits) at the chartered banks
^ this is the most narrow and liquid definition of money
BoC’s 3 main functions in the Canadian economy
- banker for commercial banks
- regulator of money supply
- banker of federal government
how can banks get closer to their target level for reserves?
when it has excess reserves, it can LEND
when it has not enough reserves, it can BORROW
assets for commercial banks
- reserves (cash, foreign currency)
- loans
- deposits at the BoC
liabilities for commercial banks
promises to pay
- deposits (from households/firms)
- capital
