Final Exam - Definitions

Question 1

money

Answer 1

the set of assets in an economy that people regularly use to buy goods and services from other people

Question 2

medium of exchange

Answer 2

an item that buyers give to sellers when they want to purchase goods or services

Question 3

unit of account

Answer 3

the yardstick people use to post prices and record debts

Question 4

store of value

Answer 4

an item that people can use to transfer purchasing power from the present to the future

Question 5

liquidity

Answer 5

the ease with which an asset can be converted into the economy’s medium of exchange

Question 6

commodity money

Answer 6

money that takes the form of a commodity with intrinsic value

Question 7

fiat money

Answer 7

money without intrinsic value that is used as money because of government decree

Question 8

currency

Answer 8

the paper bills and coins in the hands of the public

Question 9

demand deposits

Answer 9

balances in bank accounts that depositors can access on demand by writing a cheque or using a debit card

Question 10

Bank of Canada

Answer 10

the central bank of Canada

Question 11

central bank

Answer 11

an institution designed to regulate the quantity of money in the economy

Question 12

money supply

Answer 12

the quantity of money available in the economy

Question 13

monetary policy

Answer 13

the setting of the money supply by policymakers in the central bank

Question 14

reserves

Answer 14

deposits that banks have received but have not loaned out

Question 15

fractional-reserve banking

Answer 15

a banking system in which banks hold only a fraction of deposits as reserves

Question 16

reserve ratio

Answer 16

the fraction of deposits that banks hold as reserves

Question 17

money multiplier

Answer 17

the amount of money the banking system generates with each dollar of reserves

Question 18

bank capital

Answer 18

the resources a bank’s owners have put into the institution

Question 19

leverage

Answer 19

the use of borrowed money to supplement existing funds for purposes of investment

Question 20

leverage ratio

Answer 20

the ratio of assets to bank capital

Question 21

capital requirement

Answer 21

a government regulation specifying a minimum amount of bank capital

Question 22

bank rate

Answer 22

the interest rate charged by the Bank of Canada on loans to the commercial banks

Question 23

overnight rate

Answer 23

the interest rate on very short-term loans between commercial banks

Question 24

open-market operations

Answer 24

the purchase or sale of government of Canada bonds by the Bank of Canada

Question 25

quantitative easing

Answer 25

the purchase and sale by the central bank of nongovernment securities or government securities with long maturity terms

Question 26

foreign exchange market operations

Answer 26

the purchase or sale of foreign money by the Bank of Canada

Question 27

sterilization

Answer 27

the process of offsetting foreign exchange market operations with open-market operations, so that the effect on the money supply is cancelled out

Question 28

reserve requirements

Answer 28

regulations on the minimum amount of reserves that banks must hold against deposits

Question 29

quantity theory of money

Answer 29

a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate

Question 30

nominal variables

Answer 30

variables measured in monetary units

Question 31

real variables

Answer 31

variables measured in physical units

Question 32

classical dichotomy

Answer 32

the theoretical separation of nominal and real variables

Question 33

monetary neutrality

Answer 33

the proposition that changes in the money supply do not affect real variables

Question 34

velocity of money

Answer 34

the rate at which money changes hands

V=(PxY)/M

If P is the price level (the GDP deflator), Y the quantity of output (real GDP), and M the quantity of money, then velocity is

Question 35

quantity equation

Answer 35

the equation M × V = P × Y, which relates the quantity of money, the velocity of money, and the dollar value of the economy’s output of goods and services

Question 36

inflation tax

Answer 36

the revenue the government raises by creating money

Question 37

fisher effect

Answer 37

the one-for-one adjustment of the nominal interest rate to the inflation rate

Question 38

shoeleather cost

Answer 38

the resources wasted when inflation encourages people to reduce their money holdings

Question 39

menu costs

Answer 39

the costs of changing prices