Chp24 - Money, the Price Level, and Inflation

Question 1

Money

Answer 1

• any commodity or token that is generally acceptable as a means of payment
• serves 4 functions: means of payment, means of exchange, unit of account, store of value

Question 2

Means of Payment

Answer 2

• a method of settling a debt

Question 3

Medium of Exchange

Answer 3

• any object that is generally accepted in exchange for goods and services
• overcomes a double-coincidence of wants (where you need to find someone willing to barter

Question 4

Unit of Account

Answer 4

• an agreed measure for starting the prices of goods and services

Question 5

Store of Value

Answer 5

• can be held and exchanged later for goods and services

- no store of value is completely stable

Question 6

Currency

Answer 6

• the notes and coins held by individuals and businesses

Question 7

Deposits

Answer 7

• the deposits of individuals and businesses at various FIs count as money

Question 8

M1 and M2

Answer 8

• M1: currency held by individuals and businesses plus chequable deposits owned by individuals and businesses
• M2: consists of M1 plus all other deposits (non-personal non-chequable deposits & fixed term deposits)
• Both are considered money

Question 9

Liquidity

Answer 9

• the property of being easily convertible into a means of payment without loss in value

Question 10

Reserves

Answer 10

• a depository institution’s notes or coins in its own vault or its deposit account at the Bank of Canada

Question 11

Liquid Assets

Answer 11

• government of Canada treasury bills and commercial bills
• can be easily sold if banks need reserves with little risk of loss
• have a low interest rate

Question 12

Securities

Answer 12

• government of Canada bonds and other bonds
• can be converted to reserves, but prices fluctuate
• have higher interest rate

Question 13

Loans

Answer 13

• commitments of funds for an agreed-upon period of time

Question 14

Benefits of Depository Institutions

Answer 14

• Create Liquidity: borrowing short and lending long
• Pool Risk: pertaining to loans
• Lower the Cost of Borrowing
• Lower the Cost of Monitoring Borrowers

Question 15

Central Bank

Answer 15

• a public authority that supervises other banks and FIs, financial markets, and conducts monetary policy

Serves as

• Banker to Banks
• Lender of Last Resort
• Sole Issuer of Bank Notes

Question 16

Monetary Base

Answer 16

• sum of notes, coins, and depository institution deposits at the central bank
• the base that supports a nation’s currency

Question 17

Open Market Operation

Answer 17

• done to change the monetary base

- the purchase or sale of government securities by the Bank of Canada in the open market

Question 18

Desired Reserves

Answer 18

• reserves that a bank plans to hold

Desired Reserve Ratio: the ratio of reserves to deposits that a bank plans to hold

Question 19

Required Reserves

Answer 19

• reserves that a bank is required to hold

Question 20

Quantity of Money Demanded

Answer 20

• the inventory of money that people plan to hold on any given day

Influenced by:
- price level, nominal interest rate, Real GDP, Financial Innovation