Week 13: Monetary Policy Flashcards
What are the 4 requirements of money?
- Serve as a medium of exchange (trading)
- Act as a unit of account (measuring)
- Perform as a store of value (accumulating wealth)
- Acceptable as a means to deferring paying (borrowing)
Gresham’s Law
If two types of money are in circulation which are of different intrinsic values but have the same legal value, the money with lower intrinsic value (bad money) tends to circulate more widely than the one with higher intrinsic value (good money).
What is commodity money?
money whose intrinsic values is subject to supply and demand
What is specie money?
money with an inherent intrinsic value (such as being made/backed by gold or reserves
What is fiat money?
money that has no intrinsic value, backed mainly be status and/or belief
What are cheques money?
pieces of paper that can be exchanged for cash when redeemed at the issuers bank
What are electronic payments?
money transferred electronically
The Bank of Canada has authority to:
- Conduct monetary policy
- Issue all Canadian banknotes
- Manage the finances of the federal government
- Regulate the financial system
- Act as the lender of last resort
What is the operating band?
The range of interest rates between borrowing and lending
What is the deposit rate?
Banks can deposit money overnight with the Central Bank and are paid this
What is the bank rate?
Banks can also borrow money overnight from the Central Bank and pay this rate.
What is the lender of last resort?
the lender that financial institutions turn to when they’re having trouble getting loans.
What is the overnight market?
The market where financial institutions can borrow money from each other for one day
What are the implications of the role of lender of last resort?
- The lender of last resort can prevent a financial crisis.
- Is a lender of last resort to a broad set of financial institutions.
- The Bank can lose money when it makes loans to failing financial institutions.
- Bailouts can lead banks to take bigger risks.
What system does the BoC currently use to set the policy interest rate?
The floor system - target is at the floor of the operating band
3 words to describe how inflation should be?
low, stable and predictable
What is Fiscal Policy?
the measures the government takes to increase or decrease public spending and taxes.
What is Monetary Policy?
the measures the central bank takes to affect the economy by influencing the amount of money in circulation.
What is quantitative easing?
a way for the BoC to counter the risk of deflation
How does quantitative easing work?
The Central bank buys government bond which raises their price, lowers their bond yield/rate of return and makes it cheaper to borrow mney
