Post midterm information Flashcards
how is money mart different from the real eoconomy
it serves as an accessory rather than the means to the end of having highest performing real economy that we can
three primary functions of banks
financial intermediation
provide liquidity
allow for diversification of risk
financial intermediation
any firm of person who comes between borrowers and savers
provide liquidity
banks provide a bunch of assets, most financial assets are only partially liquid
allow for diversification risk
don’t put all your eggs in one basket
structure of financial system
- largest part of the money supply is credit
loanable funds
- savers who supply
- borrowers who demand
loanable funds = interest rates
market for loanable funds
- flow of funds from savers for the purpose of investment per time period
- downwards sloping for loanable funds / investments
- upwards sloping for savers / supply
- surplus = downward pressure on price
- shortage = upward pressure on price to bring it back to equilibrium
law of demand (in terms of loanable funds)
- interest goes up, quantity of loanable funds borrowed goes down
- interest rate goes down, quantity demanded of loanable funds goes up
law of supply
- price goes up, quantity supplied goes up
- price goes down, quantity supplied goes down
determinants of saving
- cultures
- presence of a social safety net
- wealth
policy to be implemented to encourage investment
- investment tax credit
- right-wingers favour this
crowding out
happens because being credit hogs and helps get the good interest rate so they jack up so private investment spending gets crowded up
major players in the financial system
- entrepreneurs
- business entrepreneurs
- businesses
- speculators
punch line for aggregate economy
- savings = investments
- equilibrium between aggregate savings and aggregate investment
3 functions of money
- medium of exchange
- unit of account
- store of value
fiat money
- declaration made by the government or bank of Canada
- doesn’t give value to currency but people’s faith that they can exchange it for concrete goods and services
intrinsically worthless (meaning the only value it holds is the claim that it’s worth something, unlike when it was gold coins)
how money is created
- money creation
stamping out coins - credit
leveraging deposits
what happens when reserves are insufficient
banks call back bank loans
the multiple creation of bank deposits
1/4 goes to reserve
3/4 goes to loan
multipler formula
change in cumulative deposits / change in original deposits
value of multipler formula
1 / desired ratio (MPS)
what is monetary aggregates
is a specific measure of money supply
M
money supply
M1
currency + demand deposits
more liquid
M2
M1 + notice deposits + savings deposits
broader magnitude
demand deposits
payable now
notice deposits
future payments
2 major types of actors in banking system structure
- central bank of canada
- depository institution
what does the bank of canada do
issue money
purpose of monetary policy
- designed to regulate the supply of money
- it influences short term interest rates
objectives of monetary policy
- to get low interest rates during recessions
- to get high interest rates durning booms
primary instruments of monetary policy
- open market operations
- changes in overnight rate
open market operations
- purchases
- sales
- to increase the money supply, the central bank has to inject new reserved into the financial system from outside of it
quantitative easing
buying bonds big time in effort to inject liquidity into work financial markets
how is equilibrium reached in the money market
move down and along the demand curve - don’t shift money supply curve until you’re given more information about monetary policy
impact of monetary policy on the macroeconomy - if the goal is to stimulate the macroeconomy
buy bonds, expand quantity of money which circulates, MS shifts right, equilibrium rate of interest falls
stimulative monetary policy
buying bonds in order to lower interest rates
restrictive monetary policy
raise interest rates to make credit expensive
tight money
high interest rates which reduces spending
bank rate and over night rate
borrow from bank of canada - bank rate
borrow from competitors - pay overnight rate
what happens when the bank of Canada and overnight rate goes up
it tightens the monetary screws so it discourages expansion of credit and send interest rates up across the board
why do financial crises occur
from a combination of irrational expectations and leverage
recency effect
basis human tendency to overvalue recent experience when trying to predict the future
leverage
the practice of using borrowed money to pay for investments
margin cell
ensures that people don’t lose money
securitization
the practice of packaging individual debts into a single asset
debt serive
the amount that consumers have to spend to pay their debts, often expresses as a percentage of disposal income
basic tenet
international trade is economically beneficial for both participants
autarky
closed economy
three important points on basic tenet
- economist view globalization as economically beneficial
- Canada’s economy is relatively open in relation to others
- thread has increased a lot
international flows of gods and capital
- changes in geoplitics
- container shifts
- financial globalization
trade balance formula
net exports (exports - imports)
net exports =
trade balance
two international flows in financial capital
FDI - foreign direct investment
FPI - foreign portfolio investments
FDI
Canadian companies have operations in foreign countries
- physical capital
FPI
Canadians acquire financial instruments issued in foreign countries
- financial capital
Net capital outflow (NCO)
purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners
when net capital outflow is positive
- financial capital is flowing out
- we are buying up their securities more than they are buying ours
- we get more securities, but make liquid payments flowing out for them
when net capital outflow is negative
- financial capital is flowing in
- they are buying up our securities more than we are buying theirs
- they get more securities, but we received liquid payments flowing in for them
NCO - NX by necessity
net value of goods and services sold bu a country (NX) = net value of financial assets acquired
NX > 0, NCO > 0
capital is flowing out
NX < 0, NCO < 0
capital is flowing in
how is the trade deficit financed
by negative net capital outflow or net capital inflow
appreciaiton
more of the foreign currency per loonies or fewer loonies per unit of the foreign currency
- makes our imports cheaper so imports increase
- makes our exports more expensive for our trading partners to obtain so exports decreases
depreciaition
less of the foreign currency per loonie, or more loonies per unit of the foreign currency
- makes imports more expensive so imports decrease
- makes our exports less expensive for our trading partners to obtain so exports increase
foreign exchange market - weaker loonies
higher exports
foreign exchange market - stronger loonie
lower exports
monetary policy in the open economy
- MS is low, interest rate is high
- financial capital flows in
demand or CAN$ by foreigners increases - Canadian dollar appreciates
- X decreases and IM increases
- NX decreases
- AD shifts left
- AD contracts
balance of trade
exports - imports
the balance-of-payments identity
shows the value of net exports equal to net capital outflow
nominal exchange rate
actual transactions rate
1$ cn = $0.75 us
real exchange rate (XR)
nominal XR
overall foreign P
formula for national savings
= investment + net exports
= I + NX
Exam QUESTION how is the trade deficit financed?
financed by negative net capital outflow or net capital inflow
total savings equals
domestic investment spending
what do central banks do? exam question
they issue currency (created at the mint), act as the bankers’ bank (for the big 5 banks),act as a banker for the federal government, executes monetary fiscal policy
