24 Econ Midterm 2

Front 1

Money

Back 1

Any commodity or token that is generally acceptable as a means of payment

Front 2

3 functions of money

Back 2

Medium of exchange

Unit of account

Store of value

Front 3

Medium of exchange

Back 3

An object that is generally accepted in exchange for goods and serives

Front 4

Barter

Back 4

In absence of money, people would need to exchange goods and services directly

Requires a double coincidence of wants which is rare

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Unit of account

Back 5

An agreed measure for stating the prices of goods and services

Front 6

Store of value

Back 6

Money can be held for a time and later exchanged for goods and services

Front 7

Money in Canada consists of

Back 7

Currency

Deposits at banks and institutions such as trust and mortgage companies/ credit unions

Front 8

Currency

Back 8

Notes and coins held by individuals and businesses

M1 and M2 are official measures of currency

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M1

Back 9

Consists of currency held by individuals and businesses plus chequable deposits owned by individuals and businesses

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M2

Back 10

Consists of M1 plus all other deposits (non-chequable deposits and fixed term deposits)

Front 11

Are M1 and M2 money

Back 11

All M1 is money

M2 -saving deposits are money but some are just liquid assets - deposits are money, cheques are not, credit cards are not

Front 12

Banking institutions

Back 12

Create money and manage the nations monetary payments

Depository institutions and Bank of Canada

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Depository institution

Back 13

A firm that takes deposits from households and firms and makes loans to other households and firms

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Nations money is made up of

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3 depository institutions

-chartered banks

-credit unions and caisses popularies

-trust and mortgage loan companies

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Chartered Bank

Back 15

A private firm, chartered under the Bank Act of 1992 to receive deposits and make loans

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Credit union

Back 16

a cooperative organization that operates under the Cooperative Credit Association Act of 1992 and that receives deposits from and makes loans to its members

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Caisse populaire

Back 17

Similar to credit unions

Operate in Quebec

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Trust and Mortgage Loan company

Back 18

A privately owned depository institution that operates under the Trust and Loan companies Act of 1992

Receive deposits, make loans act as trustee for pension funds and estates

Front 19

Bank Goals

Back 19

Maximize wealth of owners by having higher interest rates on loans than deposits

Loans generate profit but depositors must be able to obtain funds at any time

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Four types of assets in a bank

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1. Reserves - notes and coins in its vault or its deposit in the Bank of Canada

2. Liquid Assets - Canadian government Treasury bills and commercial bills

3. Securities - longer term Canadian government bonds

4. Loans - commitments of fixed amounts of money for agreed upon periods of time

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Benefits of depository institutions

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1.Create liquidity - borrowing short and lending long

2. Pool risk

3. Lower the cost of obtaining funds

4. Lower the cost of monitoring borrowers

Front 22

Bank of Canada

Back 22

Canada's central bank - public authority that regulates a nations depository institutions and control the quantity of money

Front 23

Bank of Canada is special in 3 ways

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1. banker to the banks and government

2. Lender of last resort

3. Sole issuer of bank notes

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Bank of Canada's Assets

Back 24

- government securities (treasury bills)

- last resort loans to banks

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Bank of Canada's Loans

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- Bank of Canada notes (not coins)

- Deposits of banks and the government

Front 26

Monetary base

Back 26

Sum of Bank of Canada notes outside the Bank of Canada, bank deposits at the Bank of Canada and coins held by households, firms, and banks

Front 27

Open Market Operation

Back 27

Changes monetary base by purchasing or selling securities in the open market from or to chartered bank or public

Front 28

Bank of Canada buys securities/ sells securities

Back 28

Paid with newly created reserves/ reserves held by banks

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Open market purchase

Back 29

Increases bank reserves

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Open market sale

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Decreases bank reserves

Front 31

Quantity of deposits that banks can create are limited by

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The monetary base

Desired reserves

Desired currency holding

Front 32

Size of monetary base limits total quality of money that banking system can create because

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1. Banks have desired reserves

2. Households and firms have desired currency holdings

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Desired reserve ration

Back 33

Ratio of banks reserves to total deposits that a bank plans to hold

Desired ratio exceeds required reserve ratio

Front 34

Currency drain

Back 34

Leakage of reserves into currency

Total quality of money increases, loans paid, deposits increase, people hold onto currency

Front 35

Currency drain ratio

Back 35

Ratio of currency to deposits

Front 36

Money creation process

Back 36

Bank of Canada buys securities and pays for them with newly created reserves

Front 37

Excess reserves =

Back 37

Actual reserves - Desired reserves

Banks now have more reserves but the same amount of deposits

Front 38

Money multiplier

Back 38

Ratio of change in the quantity of money to the change in the monetary base

Front 39

Quantity of money created depends on desired

Back 39

Reserve ratio and currency drain ratio. The smaller these ratios, the larger the multiplier

Front 40

Influences on money holding

Back 40

Price level

Nominal interest rate

Real GDP

Financial innovation

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Real money =

Back 41

Nominal money/Price level

Nominal money rises at the same rate as price level

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Nominal Interest Rate

Back 42

Opportunity cost of holding wealth in the form of money rater than an interest bearing asset

Front 43

Rise in nominal interest rate

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Decreases quantity of real money people plan to hold

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Increase in real GDP

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Increases spending, increases quantity of real money that people plan to hold

Front 45

Financial innovations

Back 45

Lower the cost of switching between money and interest bearing assets, decreases the quantity of real money that people plan to hold

Front 46

Tech advances include

Back 46

ATM

Credit and debit cards

Ebanking

Front 47

Demand for money

Back 47

Relationship between quantity of real money demanded and nominal interest rate. All other influences remain the same.

Front 48

Decrease/ increase in GDP/ inovation

Back 48

Shift leftward/ rightward

Front 49

Money market equilibrium occurs when

Back 49

the quantity of money demanded equals the quantity supplied

Adjustments vary between short and long run

Front 50

Short run equilibrium

Back 50

Adjusts daily to meet yearly goal

When interest rate is higher than goal, people want to hold less so they buy bonds which lowers interest

When interest rate is low people want to hold more so they sell which rises interest

Front 51

Long run equilibrium

Back 51

Loanable funds market determines real interest rate

Nominal interest rate = equilibrium real interest rate + expected inflation

Real GDP = potential GDP

Can adjust price level, nothing real will change

Front 52

Quantity theory of money

Back 52

In the long run an increase in quantity of money brings an equal percentage increase in price level

Based on velocity of circulation and equation of exchange

Front 53

Velocity of circulation

Back 53

Avg number of times in a year a dollar is used to purchase goods and services in GDP

Does not change in the long run

Front 54

Equation of exchange

Back 54

MV=PY

Quantity of money* velocity =Price level * GDP

Front 55

Inflation rate =

Back 55

money growth rate - real GDP growth

Front 56

Increase in the quantity of money =

Back 56

A/(1-L)

A- initial increase in reserve

L - what is loaned out

Front 57

Money multiplier =

Back 57

=quantity of money/ monetary base

=(Deposits + Currency)/(Currency + Reserves)

=(D + C/D)/(C/D + R/D)