Topic 1 Chapter 1 + 2 Flashcards
What are the fundamental economic concepts that form the basis for understanding financial markets?
- Scarcity: Limited resources for unlimited wants.
- Choice: Decisions about production and consumption.
- Resource allocation: Among different uses.
What is a barter system?
A system of exchange where goods and services are traded directly for other goods and services without the use of money.
What is the main challenge of a barter system?
Double coincidence of wants: Each party must have something the other desires.
What are the three functions of money?
- Medium of exchange: Facilitates transactions, eliminating the need for double coincidence of wants.
- Unit of account: Common measure of value for goods and services, simplifying price comparisons.
- Store of value: Allows individuals to save purchasing power for future use (linked to liquidity).
What is commodity money?
Money made of precious metals like gold and silver. It has intrinsic value but is difficult to transport in large quantities.
What is fiat money? Where does it value come from?
Paper money decreed by governments as legal tender (satisfactory payment for monetary debts), not backed by a physical commodity like gold.
Its value comes from government decree and public confidence.
How has the payments system evolved?
From commodity money to fiat money, cheques, electronic payments (debit cards, smart cards, e-cash), and possibly towards a more cashless society with increasing use of e-money.
What are the main monetary aggregates used by the Bank of Canada?
- M1+: Currency outside banks + chequable deposits at chartered banks.
- M2: M1+ + personal deposits at chartered banks + fixed-term deposits.
- M2+: M2 + deposits at trust and mortgage loan companies (TMLs) and credit unions and caisses populaires (CUCPs).
- M2++: M2+ + certain retail debt instruments.
- M3: M2 + non-personal term deposits + foreign currency bank deposits.
How do the monetary aggregates relate to each other?
M2 includes a broader range of assets than M1 but does not fully incorporate M1+ or M1++. This is because M1+ and M1++ include deposits at financial institutions beyond chartered banks, which are not part of M2.
Why is it important to consider different monetary aggregates?
Different aggregates can move in different directions in the short run. The choice of monetary aggregate is important for policymakers as they may need to adjust their policies based on the specific aggregate they are targeting.
What are the two main characteristics of barter transactions? What produces them?
Barter transactions are inefficient and limit economic growth. Because of double coincidence of wants.
Define liquidity
Relative ease and speed with which an asset can be converted into a medium of exchange.
What’s the most liquid asset of all?
Money because it IS the medium of exchange.
What happens in inflation with the value of money?
Prices (price level) increase rapidly, dropping the value of money.
