Krugman Textbook Chapter 14

Question 1

Money

Answer 1

Any asset that can easily be used to purchase goods and services.

Question 2

Currency in Circulation

Answer 2

Actual cash held by the public.

Question 3

Chequeable/Demand Deposits

Answer 3

Bank accounts on which people can write cheques.

Question 4

Money Supply

Answer 4

The total value of financial assets in the economy that are considered money.

Question 5

Medium of Exchange

Answer 5

An asset that individuals acquire for the purpose of trading for goods and services rather than for their own consumption.

Question 6

Store of Value

Answer 6

An asset that is a means of holding purchasing power over time.

Question 7

Unit of Account

Answer 7

A measure used to set prices and make economic calculations.

Question 8

Commodity Money

Answer 8

A medium of exchange that is a good, normally gold or silver, which has intrinsic value in other uses.

Question 9

Commodity-backed Money

Answer 9

A medium of exchange that has no intrinsic value whose ultimate value is guaranteed by a promise that it ca be converted into valuable goods on demand.

Question 10

Fiat Money

Answer 10

A medium of exchange whose value derives from its official status as a means of payment.

Question 11

Monetary Aggregate

Answer 11

An overall measure of the money supply. The most common monetary aggregates in Canada range from M1, the narrowest category (cash and all chequeable deposits at chartered banks), to M3, the broadest category (cash, all deposits in financial institutions, and money market funds).

Question 12

Near-moneys

Answer 12

Financial assets that can’t be directly used as a medium of exchange but can be readily converted into cash or chequeable deposits.

Question 13

Bank Reserves

Answer 13

Currency held by banks in their vaults plus their deposits at the Bank of Canada.

Question 14

T-account

Answer 14

A simple tool that summarizes a business’s financial position by showing in a single table the business’s assets and liabilities, with assets on the left and liabilities and equity on the right.

Question 15

Reserve Ratio

Answer 15

The fraction of bank deposits that a bank holds as reserves. Banks in Canada hold whatever reserve ratio they think is appropriate to avoid running out of cash.

Question 16

Bank Run

Answer 16

A phenomenon in which many of a bank’s depositors try to withdraw their funds due to fears of a bank failure.

Question 17

Deposit Insurance

Answer 17

A guarantee that a bank’s depositors will be paid even if the bank can’t come up with the funds, up to a maximum amount per account.

Question 18

Capital Requirements

Answer 18

Government rules imposed on a bank account to ensure the bank holds more assets than the value of its deposits, thus reducing the possibility of a bank run.

Question 19

Reserve Requirements

Answer 19

Rules set by the central bank that determines the minimum reserve ratio for banks.

Question 20

Desired/Voluntary Reserve Ratio

Answer 20

The fraction of bank deposits that banks want to hold as reserves.

Question 21

Excess Reserves

Answer 21

A bank’s reserves over and above its desired (or voluntary) reserve ratio.

Question 22

Monetary Base

Answer 22

The sum of currency in circulation and bank reserves.

Question 23

Money Multiplier

Answer 23

The ratio of the money supply to the monetary base.

Question 24

Central Bank

Answer 24

An institution that oversees and regulates the banking system and controls the monetary base.

Question 25

Overnight Funds Market

Answer 25

A financial market in which financial institutions, such as banks that are short of reserves can borrow funds from banks with excess reserves.

Question 26

Overnight Rate

Answer 26

The interest rate determined in the overnight funds market.

Question 27

Target for the Overnight Rate

Answer 27

The Bank of Canada’s official key policy interest rate.

Question 28

Bank Rate/ Discount Rate

Answer 28

The rate of interest a central bank charges on loans to banks. In many countries, this rate of interest is known as the discount rate.

Question 29

Open-Market Operation

Answer 29

The purchase or sale of assets by a central bank. For the Bank of Canada, normally these assets are Government of Canada bonds, but they may also be foreign currency.

Question 30

Deposit Switching

Answer 30

The shifting of government deposits between the Bank of Canada and the commercial banks. It is a major tool used by the Bank of Canada in its day to day operations.

Question 31

Commercial Bank

Answer 31

A bank that accepts deposits and is covered by deposit insurance.

Question 32

Leverage

Answer 32

The degree to which financial institution is financing its investments with borrowed funds.

Question 33

Balance Sheet Effect

Answer 33

The reduction in a firm’s net worth from falling asset prices.

Question 34

Vicious Cycle of Deleverage

Answer 34

Describes the sequence of events that take place when a firm’s asset sales to cover losses produce negative balance sheet effects on other firms and force creditors to call in their loans, forcing more sales of assets and causing further declines in asset prices.

Question 35

Sub-prime Lending

Answer 35

Lending to home-buyers who don’t meet the usual criteria for borrowing.

Question 36

Securitization

Answer 36

The pooling of loans and mortgages made by financial institutions and the sale of shares in such a pool to other investors.

Question 37

Investment Bank

Answer 37

A bank that trades in financial assets and is not covered by deposit insurance.