chapter 26 Flashcards
def. medium of exchange
anything that is generally accepted in return
for goods and services sold.
Money is any generally accepted medium of exchange.
how would it work if money didn’t exist?
If there were no money, goods would have to be exchanged by barter, which is a system in which goods and services are traded
directly for other goods and services.
With barter, each transaction requires a double coincidence of wants.
The double coincidence of wants is unnecessary when a medium of
exchange is used
describe money as a store of value
To be a satisfactory store of value, money must have a relatively stable value.
When the price level is stable, the purchasing power of a given sum of money is also stable.
When the price level is highly variable, so is the purchasing power of
money, and the usefulness of money as a store of value is undermined
describe money as a unit of account
Money is used for accounting, and its use for such purpose does not rely on its physical existence
what does it mean that currency is fractionally backed by reserves?
Early on, many goldsmiths and banks discovered that it was not necessary to keep one ounce of gold in the vaults for every claim to one ounce circulating as paper money.
what is fiat money? how does it work?
Our money today is fiat money—paper money or coinage that is
neither backed by nor convertible into anything else but is decreed
by the government to be legal tender.
If fiat money is generally acceptable, it is a medium of exchange.
If its purchasing power remains stable, it is a satisfactory store of
value.
If both of these things are true, it serves as a satisfactory unit of account
deposit money
Money held by the public in the form of deposits with commercial banks
def. central bank
a bank that acts as banker to the commercial
banking system and often to the government as well, and is usually
the sole money-issuing authority.
financial intermediaries
privately owned institutions that serve the general public.
They are the intermediaries between savers, from whom they accept deposits, and borrowers, to whom they make loans.
We use the term “commercial banks” to refer to all financial
intermediaries.
describe “joint responsibility” with the Bank of Canada
The organization of the Bank of Canada is designed to keep the operation of monetary policy free from day-to-day political influence.
The Bank of Canada has considerable autonomy, but the ultimate
responsibility for the Bank’s actions rests with the government.
This system is known as “joint responsibility.”
basic functions of the bank of canada:
- act as banker to the commercial banks
- act as banker to the federal government
- regulate the money supply
- support financial markets
def. assets
provide a future economic benefit
def. liabilities
presentafutureobligation
def. commercial bank
is a privately owned, profit-seeking institution
that provides a variety of financial services, such as accepting deposits from customers and making loans and other investments.
Commercial banks act as essential intermediaries in the credit market.
Commercial banks undertake interbank activities.
describe clearing house
Multibank systems make use of a clearing house, which is an institution in which interbank indebtedness, arising from the transfer of cheques between banks, is computed and offset and net amounts owing are calculated.
Commercial banks also act as profit seekers.
