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ECON 203 > Topic 9- The Monetary System > Flashcards

Topic 9- The Monetary System Flashcards

1
Q

Define money

A

any commodity/asset that is generally acceptable in exchange for g/s and debts

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2
Q

barter economies

A

WHERE G/S ARE TRADED DIRECTLYYY for g/s

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3
Q

Double coincidence of wants

A

in barter ecnonomy every transaction needs this!!

you must find someone who has what i want and wants what i have

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4
Q

what does double coincidence wants increased

A

transaction costs

you spend a lot of time finding the ideal person

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5
Q

commodity money

A

any good that can be USED EITHERRR AS MONEY, OR HAS ANOTHER VALUE/USE

Ex: people barter with barley, salt
They can either use it as money and it also has a value independant of its use as money (they can eat it)

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6
Q

common ex of commodity money

A

gold and silver

cIGS in prison

limestone in certain places

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7
Q

Fiat money

A

papedr currency that only has one value= to be used as money

no other valye

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8
Q

what is the use of fiat money

A

ONLY as currency

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9
Q

who issues fiat money

A

only ceentral abnk

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10
Q

legal tender

A

the federal govt requires that it be accepted in payment of debts, public and private

LEGALLY,, PEOPLE SHOULD ACCEPT LEGAL TENDER CURRENCY

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11
Q

The functions of money

A

unit of account
medium of exchange
STORE OF VALUE

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12
Q

Unit of account

A

money is a way of measuring market value in the ecnomy in terms of money

100 cents=1 dollar
1 chicken /= 1 cow

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13
Q

In barter econ, there is not a single measre of value, and no unit of accoount

A

of relative prices for N g/s= (N(N-1))/2

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14
Q

Without fiat money, what happens

A

high transaction costs

people would avoid market transactions

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15
Q

how many prices in a money economy

A

of Relative Prices for N g/s= N

1 egg price=1 egg

1 egg 3 cookie= 1 egg 3 cookie

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16
Q

medium of exchange
-Definition
-barter
-fiat

A

-Sellers are willing to accept the currency in exchange for g/s

-Barter: HARD TO DO THIS, because any trading parter needs to satisfy the doublel coincidence of wants [HIGH TRANSACTION COSTS]

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17
Q

storw of value
-what assets can do this
-what is the most liquid asset

A

-If you do not wanna use all the money today, your money stores value for th efuture <3
-All assets can act as a store of value generally (wine, cheese, diamonds)
-MFiat oney is the msot liquid store of value

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18
Q

Lydian coins
Alex the great coin
first paper money
bank deposit money

A

COINS made from silver
alex’s coings
china intrdouced
introduced in usa 1791

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19
Q

what is canadian tire money not

why is not a typical currency

A

it is not legal tender

because it is not generally acceptable in a majority of stores

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20
Q

The Definitions of Money Supply

A

M1

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21
Q

What is M1+

A

MOST BASIC LEVEL= MOST LIQUID
-currency outside banks + The value of all checking account deposits (chequable deposits)

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22
Q

M1++ Money Supply

A

(M1+ All non-chequable deposits)

this level is less liquid and it contains all

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23
Q

Not in the test-> M2 deposit

A

currency outside banks+ personal deposit at banks +fixed term deposits

things that are not liquid

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24
Q

M1+ —————————-> M2++

A

Most liquid to least liquid

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25
Money Supply fomrula
Currecncy outside banks + checkable deposits
26
Why do banks play an important role in determining how much money in th economy
balances in all chequing account deposits are included in the money supply Money supply= Currency outside banks+ Checking acc deposits
27
** Is there more money held in checking accounts than there is actual currency in the eocnomy
YES! so money is being created by banks
28
How do financial firms get funds
Borrowing: they borrow from their government Deposit: Banks receive funds from households, firms, govt; this is called a liability Issuing Bonds: They issue bonds and people buy them
29
What do financial firms do with the money
Loan it out: charge interest from the loans, this is an asset Buy financial securities: stocks and bonds, this is an asset
30
why do banks hold reserves
-To cover cash withdrawals from depositors (if people want to withdraw money) -To cover the payment of cheques which are deposited in other banks (If an RBC client deposits a check from CIBC, RBC should be able to go to CIBC and get that money) -To fulfill the legal reserve requirement set by central bank Bank Reserves = Reserve Ratio * Chequable Deposits
31
Reserve Ratio
the ratio of bank reserves to Chequable deposits!!! SET BY CENTRAL BANK Bank Reserve/Chequable Deposits
32
Bank Reserve formula
this dictaties the amount of reserves a bank must have Reserve ratio* Chequable Deposit
33
Liabilites
sources of funds (depositors, bonds, borrowing)
34
Assets
the uses of funds (what is the bank gonna do with these funds) (bank reserves, loans they give out, investing in stocks and bonds)
35
bank capital=net worth=stakeholder's equity
bank capital=net worth=stakeholder's equity
36
What are the bank's assets
the value of ANYTHING that is OWNED! by the bank -reserves, loans, securities -banks use the money deposited with them to make loans and buy securities Assets= Liabilities + Capital
37
Liabilites
Anything that the bank OWES!!!! - deposits, borrowing Money that people deposited in the bank, and money the bank has borrowed
38
Capital -Alternative names for capital (2 others)
The difference between total assets and total liabilities Shareholder's equity=net worth= bank capital
39
Reserves -Required -Excess
banks are required to keep a frfaction of deposits within the bank (AS VAULT CASH! OR DEPOSIT W THE CENTRAL BANK_ -Required Reserves: min fraction of deposits that banks are required to keep as reserves is called the reserve ratio -Excess Reserves: any reserves that banks hold over the required amounts are called excess resrves!
40
Are banks in Canada required to hold a specific level of reserves?
NO! this allows them to make more loans-> this makes more INVESTMENT -> MORE ECON GROWTH
41
Why do banks have excess reserves
TO AVOID BORROWING! BC THE COST OF BORROWING IS: THE MONEY YOU BORROW+ INTEREST RATE
42
Bank's T- Account
shows how a transaction changes a bank's balance sheet!
43
What is the fundamental Identity of accounting
this creates a double entry bookeeping, with every single transaction, two entries are recorded for that one transaction! If someone deposits 1000, it becomes a 1000 liability, and also record it in reserves, it becomes a 1000 value reserve
44
if 1000 is in circulation in economy, but no banking system
money supply is 1000 money supply=money outside bank+ chequable deposits
45
if 1000 is in circulation in economy, but bank is reuqired to hold 100% as reserves
(Assets= 1000 reserve|Liabilities= 1000 chequable deposits) money supply is 1000 money supply= money outside banks+ chequable deposits chequable deposit is still 1000
46
IMPORTANT!! KEEP AN EYE OUT FOR DEPOSIT VERSUSSSSSSSSSSSSSSSSSSSSSS CURRENCY!!!!!!!!!!!!!!!!!!!!!!!
Currency is the cash in hand Desposit is
47
CASE 3: When Central Bank requires Banks to hold a fraction of deposits as their reserves
If Depositors Deposit 1000, and Bank has to reserve 10% as reserves; but 1)first we record the $1000 deposit as a Liability, 2)and then consider what the bank reserves that is a $100 Asset 3) loans out the extra funds of $900 ASSETS LIABILITIES R:+$100 D: +$1000 L:+$900 Therefore MS increases by 900 (non reserved amount and money supply increases) Money Supply= Currency+Deposits = $900+ $1000
48
When banks keep a fraction of their money as reserves, and loan out the rest...
the MONEY SUPPLY INCREASES!! they create money
49
The Money Multiplier
Let Rd=The Reserve Ratio, then for each bank Reserves= Rd * Deposits
50
How much currency is outside banks if all people deposit their money in the bank
NONE, it is all deposit
51
What is 1/Rd 1/Reserve Ratio
THE MONEY MULTIPLIER
52
What can you do by manipulating the Money Multiplier
figure out what deposits is equal to! This will then contribute to your Money Supply Formula
53
What does a 10 percent required reserve ratio tell us about the money multiplier
A deposit will be multiplied by 10 times
54
In reality, why is the money multiplier not perfect? Why is the real world money multplier smaller than the aactual money multiplier?
Banks may not choose the same reserve ratio! 1. Some Banks hold more reservers (make fewer loans, and have a smaller money mulitplier) 2. Consumers keep some currency out of the bank (not everyone gives all money to the bank)
55
Bank PANIC
when all banks experience a run
56
What is the lender of last resort
THE CENTRAL BANK! giving loans to these banks so they can pay off depositors
57
What are the responsibilities of the central bank
Conduct monetary policy issue currency promote stable financial system manages federal govt finances ENGAGES in important economic research
58
Bank Rate
the interest rate charged by the Bank of Canada on loans to the commercial banks
59
Advances
SPECIAL NAME: the loans that bank of canada makes to other banks
60
The overnight Interest Rate
the interest rate on very short-term loans between commercial banks (24 hour loans)
61
How is overnight interest rate determined
by the supply and demand of funds if there is a shortage of funds, then high overnight interest rate if there is a surplus of funds, then low overnight interest rate
62
What is the purpose of overnight loans
the loans are used among banks to borrow money to balance their sheets; to pay off the daily debt
63
who issues overnight interest rate? who gives the loans? who uses these loans?
issuesd by central bank any bank issues the loans (rbc/cibc), other lil banks use these loans (rbc)/(cibc)
64
WHAT IS A BALANCED BUDGET
total saving=PRIVATE SAVINGS (Public saving+ priv saving)= pri saving public saving =0
65
Formula for # Relative prices for N goods and services -Barter economy -Fiat Economy
Barter Economy: N(N-1)/2 Fiat Economy: N
66
What does the value of money depend on
its purchasing power (inflation can make it not valuable)
67
EFT, NEFT, digital money
EFT: electronic transfer of money from one bank to another NEFTl electronic funds transger maintained by INDIAN RESERVE BANK Digital MOney: stored and managed over the internet
68
Fiat vs legal tender
fiat= paper money legal tender= legally accepted to pay debts
69
Why do we use the M1+ defintion of the money supply
IT CORRESPONDS WITH THE IDEA OF MONEY AS A MEDIUM OF EXCHANGE
70
How do banks create more money supply?
Whenever people deposit money into their checking accounts, banks reserve 10% and then they loan out the rest the loan people take out, if they deposit it in another bank, the bank will reserve 10% and loan out the rest again As the cycle continue the money supply increases because of the money supple formula it goes from MS= Currency outside bank+checking acc deposits to MS= Currency outside bank (0)+ checking acc deposit (inital loan) + new loan + new loan
71
How to calculate what the max amount your money could change the maount of currency available?
Calculate the money multiplier Multiply iti with the amount of money you deposited in bank SUBTRACT YOUR ORIG DEPOSIT FROM THIS NUMBER!!! See the growth
72
How would you calculate the min amoun tyour money could influence the amount of money supply
Banks are not obligated to make loans!!! They could keep all money as reserves and then Money supply= Currency falls by XYZ+ Deposits increaee by XYZ
73
Overnight interest rate Operating Band -Upper Limit -Lower Limit -Midpoint
Upper Limit: bank rate (lending rate) =If overnight interest rate reaches this level, Bank of Canda will loan funds (they put a cieling on the overnight interest rate) Midpoint: what the bank of canda targets as overnight interest rate Lower limit: deposit rate =If overnight interest rate reaches this level then BoC will accept depoists at this rate (putting afloor under overnight interest rate)
74
Open Market Operations -Increase money suppply -Decrease money supply
This is the buying and selling og govt bonds created by BoC to control money supply To Increase the MOney supply: -Buys govt bonds (by creating currency) -Increases money supply in economy To Decrease money supply: -Sells govt bond (by taking in money from people and removing it from circulation) -decreases the amount of money in economy
75
Why are open market operatiions called open market operations
they happen inthe open market for bonds
76
3 Bank of Canada operations 1) Open Market operations 2) chanigng overnight interest rate 3) changing reserve requirements
open market operations (buying and selling govt bonds to increase/decreas money in eocnomy) Changing overnight interest rate (chaning the cost of borrowing and selling money between banks for a short time, BY CHANGING THE BANK RATE (CIELING)) chanigng how much money is required to be saved by banks
77
Changing overnight interest rate
Banks can change the overnight interest rate by changing the bank rate (highest amount of interest rate on loans that banks give out)) Bank rate low: Banks can borrow from BoC , make loans, increase deposits, INCREAS EMONEY SUPPLY Bank Rate high: Banks do not borrow from BoC, nno loans, decreases the amount of money supply in economy
78
How does chanigng the reserve requiremnt affect the amount of money in the eoncomy
Lower reserve requirement, more money to make loans, more money HIgher reserve requirmeent, less money to make loans, less omney
79
If overnight interest rate is low, then what happens?
BANKS MAKE MORE LOANS, increas emoney supply INCREASE RESERVES
80
If overnight interest rate is high then what happens
banks make less loans, decreases moeny supply
81
more loans?
more money supply
82
open market operations names buying bonds
purchase and resale agreement

ECON 203 (16 decks)

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