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MACROECON > Unit 4 - Money and Prices in the Long Run > Flashcards

Unit 4 - Money and Prices in the Long Run Flashcards

1
Q

What are the 3 Functions of Money

A

Medium of exchange

Unit of account

Store of value

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2
Q

Medium of Exchange

A

an item that buyers give to sellers when they want to purchase goods or services

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3
Q

Unit of Account

A

the yardstick people use to post prices and record debts

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4
Q

Store of Value

A

an item that people can use to transfer purchasing power from the present to the future

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5
Q

Liquidity

A

the ease with which an asset can be converted into the economy’s me

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6
Q

What are the 2 kinds of money

A

Commodity Money

Fiat Money

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7
Q

Commodity Money

A

money that takes the form of a commodity with intrinsic value

ex. Gold

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8
Q

Intrinsic Value

A

means that the item would have value even if it were not used as money.

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9
Q

Fiat Money

A

money without intrinsic value that is used as money because of government decree

ex. paper money

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10
Q

Money Stock

A

The quantity of money circulating in the economy

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11
Q

Currency

A

the paper bills and coins in the hands of the public

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12
Q

Demand Deposits

A

balances in bank accounts that depositors can access on demand by writing a cheque or using a debit card

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13
Q

What is included in the money stock

A

Currency

Chequable Deposits (Cheq Account)

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14
Q

Central Bank

A

an institution designed to regulate the quantity of money in the economy

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15
Q

Is the Bank of Canada a Central Bank?

A

YES

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16
Q

What year was the Bank of Canada Act enacted?

A

1934

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17
Q

What are the 4 related jobs the Bank of Canada has?

A

Issue currency

Act as a banker to the commercial banks

Act as a Banker to the Canadian Government

Control the quantity of money that is made available to the economy, called money supply

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18
Q

Money supply

A

the quantity of money available in the economy

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19
Q

Monetary Policy

A

the setting of the money supply by policymakers in the central bank

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20
Q

Reserves

A

deposits that banks have received but have not loaned out

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21
Q

100 percent-reserve banking

A

Banks that only hold peoples money and do not lend out any as loans

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22
Q

T or F

if banks hold all deposits in reserve, banks do not influence the supply of money.

A

True

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23
Q

Fractional Reserve Banking

A

a banking system in which banks hold only a fraction of deposits as reserves

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24
Q

Reserve Ratio

A

the fraction of deposits that banks hold as reserves

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25
Q

T or F

when banks hold only a fraction of deposits in reserve, banks create money.

A

True

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26
Q

Money Multiplier

A

the amount of money the banking system generates with each dollar of reserves

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27
Q

T or F

the higher the reserve ratio, the less of each deposit banks loan out, and the smaller the money multiplier

A

True

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28
Q

Bank Capital

A

the resources a bank’s owners have put into the institution

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29
Q

Leverage

A

the use of borrowed money to supplement existing funds for purposes of investment

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30
Q

Leverage Ratio

A

the ratio of assets to bank capital

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31
Q

Capital Requirement

A

a government regulation specifying a minimum amount of bank capital

is to ensure that banks will be able to pay off their depositors (without having to resort to government-provided deposit insurance funds).

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32
Q

What are the Bank of Canadas tools of monetary control?

A

Open market operations

Change in reserve requirements

Changes in the over night rates

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33
Q

Bank Rate

A

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

34
Q

Overnight rate

A

the interest rate on very short-term loans between commercial banks

35
Q

T or F

The Bank of Canada can alter the money supply by changing the bank rate, which in turn causes an equal change in the overnight rate.

A

True

36
Q

T or F

a lower overnight rate encourages banks to borrow from the Bank of Canada, increases the quantity of reserves, and increases the money supply.

A

True

37
Q

T or F

The Bank of Canada lowers the overnight rate whenever it wants the money supply to expand, and raises the overnight rate whenever it wants the money supply to contract.

A

True

38
Q

Open Market Operations

A

the purchase or sale of government of Canada bonds by the Bank of Canada

39
Q

T or F

To increase the money supply, the Bank of Canada periodically buys Treasury bills (a Treasury bill is just a short-term government bond).

A

True

40
Q

T or F

To reduce the money supply, the Bank of Canada can do just the opposite: It can sell government bonds to the public. The public pays for these bonds with its holdings of currency and bank deposits, directly reducing the amount of money in circulation.

A

True

41
Q

Quantitative Easing

A

the purchase and sale by the central bank of nongovernment securities or government securities with long maturity terms

42
Q

T or F

Quantitative easing is a tool of monetary control normally used only in extraordinary circumstances.

A

True

43
Q

foreign exchange market operations

A

the purchase or sale of foreign money by the Bank of Canada

44
Q

T or F

If the Bank of Canada sells foreign currency from its foreign exchange reserves, it gets Canadian dollars in exchange. Those Canadian dollars are withdrawn from circulation, so the Canadian money supply is reduced.

A

True

45
Q

Sterilization

A

the process of offsetting foreign exchange market operations with open-market operations, so that the effect on the money supply is cancelled out

46
Q

Reserve Requirements

A

regulations on the minimum amount of reserves that banks must hold against deposits

47
Q

T or F

Money serves three functions. As a medium of exchange, it provides the item used to make transactions. As a unit of account, it provides the way in which prices and other economic values are recorded. As a store of value, it provides a way of transferring purchasing power from the present to the future.

A

True

48
Q

T or F

Commodity money, such as gold, is money that has intrinsic value: It would be valued even if it was not used as money. Fiat money, such as paper dollars, is money without intrinsic value: It would be worthless if it was not used as money.

A

True

49
Q

T or F

In the Canadian economy, money takes the form of currency and various types of bank deposits, such as chequing accounts.

A

True

50
Q

T or F

The Bank of Canada, Canada’s central bank, is responsible for controlling the supply of money in Canada. The governor and senior deputy governor of the Bank of Canada are appointed for seven-year terms, and the other directors are appointed for three-year terms. All these appointments are made by the Canadian government, which owns the Bank of Canada.

A

True

51
Q

T or F

Bank depositors provide resources to banks by depositing their funds into bank accounts. These deposits are part of a bank’s liabilities. Bank owners also provide resources (called bank capital) for the bank. Because of leverage (the use of borrowed funds for investment), a small change in the value of a bank’s assets can lead to a large change in the value of the bank’s capital. To protect depositors, bank regulators require banks to hold a certain minimum amount of capital.

A

True

52
Q

T or F

The Bank of Canada controls the supply of money primarily through changes in the overnight rate. Lowering the overnight rate increases the money supply, and raising the overnight rate reduces the money supply. The Bank of Canada may also control the money supply through open-market operations. The purchase of government of Canada bonds increases the money supply, and the sale of these bonds reduces the money supply.

A

True

53
Q

T or F

When banks loan out some of their deposits, they increase the quantity of money in the economy. Because of this role of banks in determining the money supply, the Bank of Canada’s control of the money supply is imperfect.

A

True

54
Q

Inflation

A

The overall increase of price

55
Q

Deflation

A

When prices fall

56
Q

Hyperinflation

A

Extraordinarily high rate of inflation

57
Q

T or F

When the overall price level rises, the value of money falls.

A

T

58
Q

T or F

In the long run, the overall level of prices adjusts to the level at which the demand for money equals the supply.

A

T

59
Q

T or F

The demand curve for money is downward sloping because people want to hold a larger quantity of money when each dollar buys less.

A

T

60
Q

Quantity Theory of Money

A

a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate

61
Q

Nominal Variables

A

variables measured in monetary units

62
Q

Real Variables

A

variables measured in physical units

63
Q

T or F

nominal GDP is a nominal variable because it measures the dollar value of the economy’s output of goods and services

A

True

64
Q

T or F

real GDP is a real variable because it measures the total quantity of goods and services produced and is not influenced by the current prices of those goods and services.

A

T

65
Q

Classical Dichotomy

A

the theoretical separation of nominal and real variables

66
Q

Relative Price

A

The price of one thing compared to another

Is a Real Variable, it cancels out the dollar sign

67
Q

Monetary Neutrality

A

The proposition that changes in the money supply do not affect real variable

68
Q

Velocity of Money

A

The rate at which money changes hands

V = ( P x Y ) / M

V = Velocity of Money
P = Price Lebel (GDP Deflator)
Y = Quantity of Output (Real GDP)
M = Quantity of Money

69
Q

Quantity Equation

A

the equation M × V = P × Y, which relates the quantity of money, the velocity of money, and the dollar value of the economy’s output of goods and services

70
Q

What are the 5 Steps of the Quantity theory of money

A

The velocity of money is relatively stable over time.

Because velocity is stable, when the central bank changes the quantity of money (M), it causes proportionate changes in the nominal value of output (P x Y)

The economy’s output of goods and services (Y) is primarily determined by factor supplies (labour, physical capital, human capital, and natural resources) and the available production technology. In particular, because money is neutral, money does not affect output.

With output (Y) determined by factor supplies and technology, when the central bank alters the money supply (M) and induces proportional changes in the nominal value of output (P x Y), these changes are reflected in changes in the price level (P).

Therefore, when the central bank increases the money supply rapidly, the result is a high rate of inflation.

71
Q

T or F

hyperinflation is generally defined as inflation that exceeds 50 percent per month.

A

T

72
Q

Inflation Tax

A

The revenue the government raises by creating money

the inflation tax is like a tax on everyone who holds money.

73
Q

Nominal Interest Rate

A

Rate you hear about at your bank

Nominal Interest Rate = Real Interest Rate + Inflation Rate

74
Q

The real interest rate

A

corrects the nominal interest rate for the effect of inflation in order to tell you how fast the purchasing power of your savings account will rise over time. The real interest rate is the nominal interest rate minus the inflation rate

Real Interest Rate = Nominal Interest Rate - Inflation Rate

75
Q

T or F

When the Bank of Canada increases the rate of money growth, the result is both a higher inflation rate and a higher nominal interest rate.

A

True

76
Q

Fisher Effect

A

the one-for-one adjustment of the nominal interest rate to the inflation rate

77
Q

Shoeleather cost

A

The resources wasted when inflation encourages people to reduce their money holdings

Called this because youre making more trils to the bank causing your shoes to wear out faster.

78
Q

T or F

The typical Canadian firm changes its prices about once a year.

A

T

79
Q

Menu Costs

A

The costs of changing prices

80
Q

What is the long term causes and costs of inflation ?

A

The growth in the quantity of money

81
Q
A

MACROECON (2 decks)

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