Chapter 8: Money, The price level, and inflation Flashcards
What is M1?
Currency held by individuals and businesses + chequable deposits owned by individuals and business
What is M2?
M1 + non-chequable deposits + fixed termed deposits
What is depository institution?
a firm that takes deposits and from households firms and makes loans to other households and firms
Ex. Chartered Banks, credit unions and caisses populaires, trust and mortgage loan companies
What is insolvency?
- When a bank’s liabilities exceeds their value in assets
- has negative net worth
What is capital buffer?
banks maintain a required amount of owners’ capital to prevent insolvency
What is iliquidity?
difficulty of quickly and easily converting an asset into cash without a significant loss in value
What are open market operations?
purchase or sale of government securities by the Bank of canada in the loanable funds market
What is the monetary base?
sum of bank of canada notes, coins and banks’ deposits at the bank of Canada
what is the desired reserves ratio?
the bank’s reserves to total deposits that a bank plans to hold
What is the currency drain ratio?
Currency to deposits
What is money multiplier?
Change in quantity of money to change in monetary base
What is quantity theory of money?
in the long run, an increase in the quantity of money brings an equal percentage increase in the price level.
what is the velocity of circulation?
the average number of times in a year that each dollar of money gets used to buy final goods and services
What are the bank of canada’s main assets?
- Government securities
- Loans to depository institutions
What are the bank of canada’s liabilities?
- bank of canada notes
- depository institution deposits
What are liquid assets?
Government of Canada treasury bills and commercial bills
- These are a bank’s first line of defence if they need reserves
- They can be sold and converted into reserves with * virtually no risk of loss
- Since they are low risk, they also earn a low interest rate
What are securities?
Government of Canada bonds and other bonds such as mortgage backed securities
- These assets can be converted into reserves but at prices that fluctuate
- Since their prices fluctuate they are riskier than liquid assets but they earn a higher interest rate
