The Monetary System

Question 1

Most common form of money

Answer 1

Currency

Question 2

Money

Answer 2

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

Question 3

2 types of money

Answer 3

Commodity Money and Fiat Money

Question 4

Intrinsic Value

Answer 4

Item that would have value even if it wasn’t used as money.

Question 5

Commodity Money

Answer 5

Money in the form of a commodity that has intrinsic value

Question 6

Fiat Money

Answer 6

Money that has no intrinsic value that is used as money because of government decree

Question 7

Why is currency not a commodity money?

Answer 7

It has no intrinsic value

Question 8

3 Functions of Money

Answer 8

Medium of Exchange, Unit of Account, Store of Value

Question 9

Are Credit Cards a form of money? Why or why not?

Answer 9

Not money. You are storing debt, not value

Question 10

Debit Cards and Cheques are what type of money?

Answer 10

Liquid money

Question 11

Liquidity

Answer 11

The ease to which an asset can be converted to an economy’s medium of exchange

Question 12

Most important function of the Bank of Canada

Answer 12

Regulate the amount of money in circulation

Question 13

Which Canadian Institution prints money?

Answer 13

Royal Canadian Mint

Question 14

4 primary functions of the Bank of Canada

Answer 14

Issue Currency, Act as a banker to Commercial Banks (Second Floor Banking, Act as a banker to Canadian government, Control money supply

Question 15

T-Account

Answer 15

Banks’ accounting system

Question 16

Deposits are what for the banks?

Answer 16

Liabilities, because they are not the banks’ money

Question 17

T-Account divided into these two section

Answer 17

Assets and Liabilities

Question 18

Reserves (R)

Answer 18

Deposits that banks received but have not yet loaned out

Question 19

Two types of reserves

Answer 19

Required and Excess

Question 20

Required Reserves are required by who?

Answer 20

Bank of Canada

Question 21

How do we measure money supply?

Answer 21

Currency + Demand Deposits

Question 22

Currency

Answer 22

The paper bills and coins in the hands of the public

Question 23

Demand Deposits (D)

Answer 23

Balances in bank accounts that depositors can access on demand by writing a check or using a debit card.

Question 24

100% Reserve Banking

Answer 24

Money Supplied = Currency + Demand Deposits

Banks don’t lend your money

Question 25

Fractional Reserve Banking

Answer 25

Modern Banking - Banks keep a portion of your deposits as reserves and loans the rest out to the public - banks create money

Question 26

Reserve Ratio (R)

Answer 26

Fraction of deposits that banks hold as reserves

Question 27

Money Multiplier

Answer 27

The amount of money the banking system generates from each dollar of reserves

Question 28

Money Multiplier Formula

Answer 28

1/R (Reserve Ratio)

Question 29

Bank Run

Answer 29

A situation in which banks cannot repay their depositors because their loans are not recoverable

Question 30

Three tools that the Bank of Canada can use to alter the amount of money in circulation (Money Supply)

Answer 30

Open Market Operations and Foreign Exchange Market Operations, Changing Reserve Ratio, Changing Key Bank Rate

Question 31

What can the Bank of Canada buy with Canadian Currency to increase money supply?

Answer 31

Bonds and foreign currencies

Question 32

Sterilization

Answer 32

Central Bank counteracts the effects of money supply of buying bonds by selling foreign currencies. The reverse is also possible

Question 33

Key Bank Rate

Answer 33

Short term (day to day) interest rate for loans given by the Bank of Canada to commercial banks.

Question 34

Who determines the Key Bank Rate

Answer 34

The central bank - eg Bank of Canada

Question 35

When banks don’t have enough excess reserves to loan money, what can it do?

Answer 35

Loan money from Central Bank (Bank of Canada) or loan money from other commercial banks

Question 36

What does the Bank of Canada call itself? Why?

Answer 36

Lender of last resort. It does not like lending money and will only lend if no one else will lend money to the bank.

Question 37

Name of the interest rate applied on loans given by commercial banks to other banks

Answer 37

Overnight rate

Question 38

Key Bank Rate and Overnight Rate Relationship

Answer 38

Key bank rate must be 2 basis points higher than overnight rate

Question 39

Basis point

Answer 39

.01%

Question 40

When Key bank rate changes, the overnight rate…

Answer 40

along with other rates like mortgage rates, immediately adjusts to be slightly lower than the key bank rate

Question 41

Bank of Canada faces two problems that arise from fractional reserve banking:

Answer 41

Bank of Canada cannot control the amount of money that households choose to deposit in banks and the amount of money banks choose to lend

Question 42

A bank is solvent when

Answer 42

assets exceed liabilities