Chapter 9: Money

Question 1

Money

Answer 1

Any assets that can easily be used to purchase goods and services (most liquid assets in the economy, as opposed to for example, stocks, which must be traded before it can be converted to cash)

Question 2

What are the three functions money must perform?

Answer 2

1) medium of exchange: asset people use to trade for g&s’s
2) store of value: an asset that allows us to store our purchasing power
3) Unit of Account: commonly accepted measure people use to set prices and make economic calculations

Question 3

When was the Bank of Canada founded & what was its consequence?

Answer 3

1934. Commercial banks no longer allowed to print money; now money can only be printed by the bank of canada

Question 4

Bank

Answer 4

A financial intermediary that accepts deposits from savers and converts these deposits into loans to borrowers as well as making other investments; brings savers and borrowers together

Question 5

Which Canadian banks were listed as “too big to fail”

Answer 5

1) RBC (2016*)

2) TD (2019)

Question 6

4 Functions of a Central Bank

Answer 6

1) serves as the lender of last resort (the banker’s bank) … the interest rate that the BOC charged chartered banks is challed the bank rate
2) acts as banker for the federal govt
3) issues currency (BOC only inst. in canada that can print money)
4) conducts monetary policy

Question 7

T/f : BOC has complete control over the canadian money supply

Answer 7

False. Money can be created by commercial banks as well through loan creation process.

Question 8

Money Multiplier =

Answer 8

MM = (money supply)/(monetary base)

Question 9

Monetary Base

Answer 9

The sum of currency in circulation and bank reserves (i.e. MB= CC + BR)

Question 10

Who is the bank of canada owned by?

Answer 10

Federal Government

Question 11

Overnight rate

Answer 11

(Key interest rate) The interest rate that the commercial banks charge each other for borrowing from each other

Question 12

Bank Rate is ___ basis points above the overnight rate

Answer 12

25 basis points, i.e. Bank Rate = overnight rate + 0.25%

Question 13

What is the Bank Rate?

Answer 13

The bank rate is the rate at which chartered banks may borrow from the central bank (i.e. BOC) when they fail to borrow among themselves

Question 14

Open Market Operations

Answer 14

The purchases and sales of government bonds by the central bank

Question 15

Central bank purchases government bonds

Answer 15

Open Market Purchase

Question 16

Central Bank sells government bonds

Answer 16

Open market sale

Question 17

What is the primary reason for the central bank to carry out open market operations?

Answer 17

Change the monetary base and increase money supply

Question 18

Open market purchase is aka ________. It is a form of ______ monetary policy.

Answer 18

Quantitative easing. A form of expansionary monetary policy

Question 19

Open market sale is aka as _______. It is a form of _____ monetary policy.

Answer 19

Quantitative tightening. Contractionary monetary policy.

Question 20

What is deposit switching and what does it do?

Answer 20

The moving of government deposits between the Bank of Canada and chartered banks. By doing this, the Bank of Canada can change the monetary base via a change in bank reserves.
–>/\ in MB –> /\ in MS

Question 21

Money supply targeting

Answer 21

Keeping money supply at a pre-specified level

Question 22

Interest rate targeting

Answer 22

Keeping interest rate at a pre-specified level

Question 23

Why is interest rate targeting more effective than money supply targeting (w/r/t households & firms)?

Answer 23

It’s easier for household and firms to understand the implications of a change in interest rate than a change in money supply.

Question 24

What’s the difference between the money supply and the monetary base?

Answer 24

Money supply is the quantity of money available in an economy for immediate use. (MS = CC+DD)
The monetary base is the sum of currency in circulation and the amt. of bank reserves (MB = CC+BR)

Note that money injected into the economy by the central bank results in a much larger increase in overall money (MS) through the process of credit creation.