Final Exam - Definitions Flashcards
money
the set of assets in an economy that people regularly use to buy goods and services from other people
medium of exchange
an item that buyers give to sellers when they want to purchase goods or services
unit of account
the yardstick people use to post prices and record debts
store of value
an item that people can use to transfer purchasing power from the present to the future
liquidity
the ease with which an asset can be converted into the economy’s medium of exchange
commodity money
money that takes the form of a commodity with intrinsic value
fiat money
money without intrinsic value that is used as money because of government decree
currency
the paper bills and coins in the hands of the public
demand deposits
balances in bank accounts that depositors can access on demand by writing a cheque or using a debit card
Bank of Canada
the central bank of Canada
central bank
an institution designed to regulate the quantity of money in the economy
money supply
the quantity of money available in the economy
monetary policy
the setting of the money supply by policymakers in the central bank
reserves
deposits that banks have received but have not loaned out
fractional-reserve banking
a banking system in which banks hold only a fraction of deposits as reserves
reserve ratio
the fraction of deposits that banks hold as reserves
money multiplier
the amount of money the banking system generates with each dollar of reserves
bank capital
the resources a bank’s owners have put into the institution
leverage
the use of borrowed money to supplement existing funds for purposes of investment
leverage ratio
the ratio of assets to bank capital
capital requirement
a government regulation specifying a minimum amount of bank capital
bank rate
the interest rate charged by the Bank of Canada on loans to the commercial banks
overnight rate
the interest rate on very short-term loans between commercial banks
open-market operations
the purchase or sale of government of Canada bonds by the Bank of Canada
quantitative easing
the purchase and sale by the central bank of nongovernment securities or government securities with long maturity terms
foreign exchange market operations
the purchase or sale of foreign money by the Bank of Canada
sterilization
the process of offsetting foreign exchange market operations with open-market operations, so that the effect on the money supply is cancelled out
reserve requirements
regulations on the minimum amount of reserves that banks must hold against deposits
quantity theory of money
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
nominal variables
variables measured in monetary units
real variables
variables measured in physical units
classical dichotomy
the theoretical separation of nominal and real variables
monetary neutrality
the proposition that changes in the money supply do not affect real variables
velocity of money
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
quantity equation
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
inflation tax
the revenue the government raises by creating money
fisher effect
the one-for-one adjustment of the nominal interest rate to the inflation rate
shoeleather cost
the resources wasted when inflation encourages people to reduce their money holdings
menu costs
the costs of changing prices
