Chapter 9: Money Flashcards
Money
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)
What are the three functions money must perform?
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
When was the Bank of Canada founded & what was its consequence?
- Commercial banks no longer allowed to print money; now money can only be printed by the bank of canada
Bank
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
Which Canadian banks were listed as “too big to fail”
1) RBC (2016*)
2) TD (2019)
4 Functions of a Central Bank
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
T/f : BOC has complete control over the canadian money supply
False. Money can be created by commercial banks as well through loan creation process.
Money Multiplier =
MM = (money supply)/(monetary base)
Monetary Base
The sum of currency in circulation and bank reserves (i.e. MB= CC + BR)
Who is the bank of canada owned by?
Federal Government
Overnight rate
(Key interest rate) The interest rate that the commercial banks charge each other for borrowing from each other
Bank Rate is ___ basis points above the overnight rate
25 basis points, i.e. Bank Rate = overnight rate + 0.25%
What is the Bank Rate?
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
Open Market Operations
The purchases and sales of government bonds by the central bank
Central bank purchases government bonds
Open Market Purchase
Central Bank sells government bonds
Open market sale
What is the primary reason for the central bank to carry out open market operations?
Change the monetary base and increase money supply
Open market purchase is aka ________. It is a form of ______ monetary policy.
Quantitative easing. A form of expansionary monetary policy
Open market sale is aka as _______. It is a form of _____ monetary policy.
Quantitative tightening. Contractionary monetary policy.
What is deposit switching and what does it do?
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
Money supply targeting
Keeping money supply at a pre-specified level
Interest rate targeting
Keeping interest rate at a pre-specified level
Why is interest rate targeting more effective than money supply targeting (w/r/t households & firms)?
It’s easier for household and firms to understand the implications of a change in interest rate than a change in money supply.
What’s the difference between the money supply and the monetary base?
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.
