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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
Q

Money Supply fomrula

A

Currecncy outside banks + checkable deposits

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26
Q

Why do banks play an important role in determining how much money in th economy

A

balances in all chequing account deposits are included in the money supply

Money supply= Currency outside banks+ Checking acc deposits

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27
Q

**

Is there more money held in checking accounts than there is actual currency in the eocnomy

A

YES! so money is being created by banks

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28
Q

How do financial firms get funds

A

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

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29
Q

What do financial firms do with the money

A

Loan it out: charge interest from the loans, this is an asset

Buy financial securities: stocks and bonds, this is an asset

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30
Q

why do banks hold reserves

A

-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

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31
Q

Reserve Ratio

A

the ratio of bank reserves to Chequable deposits!!! SET BY CENTRAL BANK

Bank Reserve/Chequable Deposits

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32
Q

Bank Reserve formula

A

this dictaties the amount of reserves a bank must have

Reserve ratio* Chequable Deposit

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33
Q

Liabilites

A

sources of funds
(depositors, bonds, borrowing)

34
Q

Assets

A

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
Q

bank capital=net worth=stakeholder’s equity

A

bank capital=net worth=stakeholder’s equity

36
Q

What are the bank’s assets

A

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
Q

Liabilites

A

Anything that the bank OWES!!!!
- deposits, borrowing

Money that people deposited in the bank, and money the bank has borrowed

38
Q

Capital
-Alternative names for capital (2 others)

A

The difference between total assets and total liabilities

Shareholder’s equity=net worth= bank capital

39
Q

Reserves
-Required
-Excess

A

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
Q

Are banks in Canada required to hold a specific level of reserves?

A

NO! this allows them to make more loans-> this makes more INVESTMENT -> MORE ECON GROWTH

41
Q

Why do banks have excess reserves

A

TO AVOID BORROWING! BC THE COST OF BORROWING IS:
THE MONEY YOU BORROW+ INTEREST RATE

42
Q

Bank’s T- Account

A

shows how a transaction changes a bank’s balance sheet!

43
Q

What is the fundamental Identity of accounting

A

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
Q

if 1000 is in circulation in economy, but

no banking system

A

money supply is 1000
money supply=money outside bank+ chequable deposits

45
Q

if 1000 is in circulation in economy, but

bank is reuqired to hold 100% as reserves

A

(Assets= 1000 reserve|Liabilities= 1000 chequable deposits)

money supply is 1000

money supply= money outside banks+ chequable deposits

chequable deposit is still 1000

46
Q

IMPORTANT!! KEEP AN EYE OUT FOR DEPOSIT VERSUSSSSSSSSSSSSSSSSSSSSSS CURRENCY!!!!!!!!!!!!!!!!!!!!!!!

A

Currency is the cash in hand

Desposit is

47
Q

CASE 3: When Central Bank requires Banks to hold a fraction of deposits as their reserves

A

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
Q

When banks keep a fraction of their money as reserves, and loan out the rest…

A

the MONEY SUPPLY INCREASES!!

they create money

49
Q

The Money Multiplier

A

Let Rd=The Reserve Ratio, then for each bank

Reserves= Rd * Deposits

50
Q

How much currency is outside banks if all people deposit their money in the bank

A

NONE, it is all deposit

51
Q

What is 1/Rd

1/Reserve Ratio

A

THE MONEY MULTIPLIER

52
Q

What can you do by manipulating the Money Multiplier

A

figure out what deposits is equal to! This will then contribute to your Money Supply Formula

53
Q

What does a 10 percent required reserve ratio tell us about the money multiplier

A

A deposit will be multiplied by 10 times

54
Q

In reality, why is the money multiplier not perfect?

Why is the real world money multplier smaller than the aactual money multiplier?

A

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
Q

Bank PANIC

A

when all banks experience a run

56
Q

What is the lender of last resort

A

THE CENTRAL BANK! giving loans to these banks so they can pay off depositors

57
Q

What are the responsibilities of the central bank

A

Conduct monetary policy

issue currency

promote stable financial system

manages federal govt finances

ENGAGES in important economic research

58
Q

Bank Rate

A

the interest rate charged by the Bank of Canada on loans to the commercial banks

59
Q

Advances

A

SPECIAL NAME: the loans that bank of canada makes to other banks

60
Q

The overnight Interest Rate

A

the interest rate on very short-term loans between commercial banks (24 hour loans)

61
Q

How is overnight interest rate determined

A

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
Q

What is the purpose of overnight loans

A

the loans are used among banks to borrow money to balance their sheets; to pay off the daily debt

63
Q

who issues overnight interest rate?

who gives the loans? who uses these loans?

A

issuesd by central bank

any bank issues the loans (rbc/cibc), other lil banks use these loans (rbc)/(cibc)

64
Q

WHAT IS A BALANCED BUDGET

A

total saving=PRIVATE SAVINGS
(Public saving+ priv saving)= pri saving

public saving =0

65
Q

Formula for # Relative prices for N goods and services

-Barter economy
-Fiat Economy

A

Barter Economy: N(N-1)/2

Fiat Economy: N

66
Q

What does the value of money depend on

A

its purchasing power (inflation can make it not valuable)

67
Q

EFT, NEFT, digital money

A

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
Q

Fiat vs legal tender

A

fiat= paper money

legal tender= legally accepted to pay debts

69
Q

Why do we use the M1+ defintion of the money supply

A

IT CORRESPONDS WITH THE IDEA OF MONEY AS A MEDIUM OF EXCHANGE

70
Q

How do banks create more money supply?

A

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
Q

How to calculate what the max amount your money could change the maount of currency available?

A

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
Q

How would you calculate the min amoun tyour money could influence the amount of money supply

A

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
Q

Overnight interest rate Operating Band
-Upper Limit
-Lower Limit
-Midpoint

A

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
Q

Open Market Operations
-Increase money suppply
-Decrease money supply

A

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
Q

Why are open market operatiions called open market operations

A

they happen inthe open market for bonds

76
Q

3 Bank of Canada operations
1) Open Market operations
2) chanigng overnight interest rate
3) changing reserve requirements

A

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
Q

Changing overnight interest rate

A

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
Q

How does chanigng the reserve requiremnt affect the amount of money in the eoncomy

A

Lower reserve requirement, more money to make loans, more money

HIgher reserve requirmeent, less money to make loans, less omney

79
Q

If overnight interest rate is low, then what happens?

A

BANKS MAKE MORE LOANS, increas emoney supply INCREASE RESERVES

80
Q

If overnight interest rate is high then what happens

A

banks make less loans, decreases moeny supply

81
Q

more loans?

A

more money supply

82
Q

open market operations names

buying bonds

A

purchase and resale agreement

ECON 203 (16 decks)

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