Money Flashcards
What are the functions of money?
Money acts as a medium of exchange ($ widely used to make payments), unit of account (to quote prices), and a store of value (carries purchasing power to the future).
What is liquidity?
It is the ease of converting an asset into cash. (Example of liquid assets; T-bills, bonds, stocks, etc.) (Examples of Illiquid asset: a house).
Assets from most to least liquid? (currency, stocks, fine art)
- Currency
- Stocks
- Fine Art
What is included in M2 but not in M1?
Savings deposits.
What is not included in M1 and M2?
Credit card balances.
The Bank of Canada controls the supply of money , the value of money and regulated the banking system but it does not…
Make loans to individuals.
Who owns the Bank of Canada?
The federal government of Canada.
When do banks hold as many reserves as they hold deposits?
In a 100-percent-reserve banking system.
What actions increase money supply?
- Lowering bank rate
- Lowering the reserve requirement ratio.
What is a bank run?
A panic situation where many depositors rush simultaneously to withdraw their deposit money in the form of cash.
Why is the possibility of a bank-run extremely small in Canada today?
The Canadian Deposit Insurance Corporation provides deposit insurance on eligible deposits, so most depositors would not feel the need to withdraw all their money in panic.
How does the Bank of Canada buying bonds change money supply?
If the Bank of Canada buys bonds, it pays for them with money (increase in money supply)
How does the Bank of Canada raising the bank rate change money supply?
If the Bank of Canada raises the bank rate, banks will borrow less from the bank, leading to fewer reserves (decrease in money supply).
How does the Bank of Canada raising the reserve requirement change money supply?
If the Bank of Canada raises the reserve requirement, banks will have to hold more of its deposits as reserves, meaning the have less to hand out. (With less money to lend out, deposits and money supply decreases).
