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92 Cards in this Set
- Front
- Back
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Money definition |
the economic term for assets that are readily used and accepted as payment |
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Money is the way we typically measure prices, so it is strictly related to the concept of _________ |
inflation |
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Money has an impact on real variables like _________ and ________ |
unemployment and real GDP |
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Functions of money |
-medium of exchange -unit of account -store of value |
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Medium of exchange |
-money allows us to exchange goods and services with less cost in terms of time and effort |
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Without money we would need to trade through _________ |
barter (medium of exchange) |
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Unit of account |
money is the basic unit for measuring economic value -most goods and services are traded for money, so it is natural to express their value in money |
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In some cases money might be a poor unit of account, like in ______________ ; but these are exceptions |
countries with hyperinflation |
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Store of value |
money is a way of storing wealth, so it is an asser |
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_______ is the ease with which an asset can be converted into a medium of exchange and used to buy goods and services |
Liquidity |
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What is the most liquid asset? |
money |
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It is true that other financial assets pay higher returns, but this is in exchange for the fact that they are __________ |
less liquid than money |
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Types of money |
-fiat money -commodity money |
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Fiat money |
money that has no intrinsic value (paper, bills, coins) |
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Commodity money |
money with intrinsic value (gold or silver coins) |
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__________ has to be accepted in exchange for goods and services and for repayment of debt by government decree |
Fiat money |
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A monetary system in which gold is used as money |
Gold standard |
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Money supply is ; |
the quantity of money in the economy |
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The quantity of money in the economy is decided by _____________ |
the central bank |
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Monetary policy |
the decisions and actions that the central bank implements to change the money supply in the economy |
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central bank of Canada is called |
the Bank of Canada |
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There are alternative definitions of money supply, based on the liquidity of the assets that they include. The most used are : |
B = currency and banks reserve M1 = B + demand deposits (chequing accounts) M2 = M1 + personal savings deposits |
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The distinction between monetary and non-monetary assets is __________ |
controversial |
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Are credit cards money? |
NO |
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The measures of money table |
ADD TABLE |
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The money supply in the economy is affected by : |
- the central bank - depositary institutions - the public |
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The central bank is responsible for _______________ |
setting monetary policies |
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Affects the economy through their activity of accepting deposits and making loans |
Depositary institutions |
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The public affects the economy through __________________ |
their decision of holding money in currency of deposits |
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Formula for M1 |
M1 = currency + demand deposits = C + D |
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The Central Bank changes the money supply through three channels, which are _____________ |
-open market operation -deposit-switching -bank rate |
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Open market operations |
the purchase and sale of federal government bonds form the public and banks |
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Open market purchases will _________ the money supply |
increase t |
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Open market sales will ____________ the money supply |
decrease |
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Deposit-switching |
-a switch of the deposits of the government of Canada from the Bank of Canada to chartered banks. -this channel works through the role of banks in the money supply. |
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Bank rate |
-the rate that the Bank of Canada charges to lend reserves to charted banks -this channel works mostly as a signal |
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Balance sheet |
an accounting statement that reports Assets (left hand side) and Liabilities (right hand size) of a company |
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For a bank, Assets are ______________ |
-reserves -loans -securities |
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For a bank, Liabilities are ____________ |
-deposits -debt -capital (owners equity) |
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The balance sheet is always in ________ |
balance -total of Assets = total of Liabilities |
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What happens if a bank receives a deposit? |
Liabilities will increase (Deposits), and the amount of its Assets will increase by the same amount (Reserves) |
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The reserve-deposit ration (rr) |
the fraction of deposits that a bank keeps in the form of reserves. |
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What is (1 - rr)? |
the fraction of deposits that the bank will use to extend new loans |
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The reserve-deposit ratio (rr) is an important determinant of _________________ |
the total change in the money supply following an initial increase in deposits |
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Total change in Money supply (equation) = |
= Initial deposit + (1 - rr) x Initial deposit + (1 - rr)^2 x Initial deposit + .... = (1/rr) x Initial deposit |
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A lower reserve-deposit ratio will increase the ___________ and the total change in the money supply will be _________ |
amplification process and the total change in the money supply will be larger |
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Individuals and business will usually keep a fraction of their money in the form of __________ |
currency |
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The currency-deposit ration (cr) is : |
the amount of currency that people hold as fraction of their holdings of deposits |
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The average-currency deposit ratio (cr) of people in the economy is an important determinant of ___________ |
the total change in the money supply following an initial increase in deposits. |
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The sum B = C + R is called : |
monetary base |
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the Bank of Canada will use its policy instruments to control the dollars held by the public as __________ and by banks as ___________ |
the public = currency (C) the banks = reserves (R) |
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how do the banks decide their reserved-deposit ratio? |
rr = R (reserves ) /D (deposits) -the fraction of deposits that they want to hold as reserves |
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How will people decide their desired currency-deposit ratio? |
cr = C (currency) / D (deposits) - the fraction of deposits that they want to hold as currency |
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What is the definition of money multiplier |
tells us how many times the monetary base is multiplied through the money creation process |
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What is the money multiplier formula |
m = (cr + 1) / (cr + rr) |
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What is the quantity Theory of Money? |
It's a theory that relates money demand to the amount of money needed to realize transactions |
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What is the quantity equation? |
M x V = P x Y |
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M |
money |
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V |
- velocity of money - rate at which money circulates in the economy |
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P |
the average price |
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Y |
output |
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What does P x Y represent? |
nominal GDP |
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The quantity equation is an _________ : it always holds by definition |
identity |
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Define real money balances M/P |
the purchasing power of the stock of money |
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What is the money demand function (M/P)^d |
a function showing the quantity of real money balances people wish to hold |
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Define (M/P)^d = kY |
k is a constant reflecting how much money people want to hold as a fraction of Y |
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What does (1/V) = k tell us |
when people want to hold a lot of cash, money changes hands infrequently |
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What formula can be deduced from the quantity equation |
(M / V) ^ d = (1 / V) Y |
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Assumption in the Quantity of theory of money, in the Classical model |
V is fixed Y is fixed |
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Keeping the assumptions in mind, what does the quantity of theory tell us |
-the change in percentage in M (which is assumed to be controlled by the central bank), will determine the percentage change in P -AKA inflation rate -the central bank is assumed to have ultimate control over the inflation rate |
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Seigniorage |
the revenue the government obtains by printing money and increasing the inflation rate |
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The fisher equation formula |
i = r + |
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The fisher equation relates : |
the nominal interest rate (i) to the real interest rate (r) and the inflation rate (π) |
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The Quantity Theory and the Fisher equation together allow us to ... |
understand the link between the growth rate of M, inflation, and the nominal interest rate |
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Testable implication of the Fisher equation : |
the % increase in M (growth rate of money) will determine the % change in price level (inflation), which will increase the nominal interest by the same percentage |
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In the classical model, the real interest rate (r) is obtained from the ___________ in the _________ _______ market, and it is not affected by the policies of the central bank |
is obtained from the equilibrium in loanable funds market, and it is not affected by the policies of the central bank |
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The two concepts of the real interest rate |
1. ex ante : the real interest rate that individuals consider when making decisions before they observe the actual inflation rate (think about a multi-year loan). This real interest rate is defined as r^ea = i - Eπ 2. ex post : the real interest rate defined using actual inflation ; r^ea = i - π -Eπ = expected inflation |
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Which concept of the real interest rate is the best? Why? |
ex ante : r^ea = i - Eπ - because actual inflation is typically not known when the nominal interest rate is set. Thus, this equation reflects the idea that is expected inflation that affects i, not the actual one |
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Considering the function of money as store value, why should demand for money also depend on the nominal interest rate i? |
- money is an asset that gives a expected earning of - Eπ - alternative assets earn the real interest rate r - the difference is r - ( -Eπ) = i according to the Fisher's equation. Thus, i is the price of holding money, so the quantity f real money balances people wish to hold will be decreasing in i |
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What is a more realistic version of the demand function |
(M / P)^d = L (i / Y) |
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The linkage among money, prices, and interest rates tableau |
ADD TABLEAU |
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According to the Fisher's equation, expected inflation affects the ________________ and thus ______________ |
expected inflation affects the nominal interest rate and thus the demand for money |
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As inflation expectations are expectations about future money prices, they will also reflect expectations about the _________________ |
- future money supply - i.e. monetary policies |
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What is the self-fulfilling expectations |
-if individuals expect the money supply to increase, Eπ will increase, so the nominal interest rate i will increase, and the quantity of money people want to hold will decrease |
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Cagan's model of hyperinflation formula |
-PUT IN FORMULA, slide 28 |
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What are some costs of expected inflation? |
-shoeleather cost (cost of making trips to the bank) -menu costs -inefficiency in the allocation of resources -costs related to taxes (because nominal variables are taxed, so we pay taxes on inflation) |
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What are some unexpected costs of inflation |
-unexpected redistribution of wealth between borrowers and lenders |
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Definition, real variables |
-variables measured in physical units -quantities or relative prices |
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Definition, nominal variables |
-variables measured in money |
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What is classical dichotomy |
- the separation between real and nominal variables -a fundamental characteristics of the Classical model - it allows to look at the equilibrium in the real markets without considering nominal variables (money, for instance) |
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The Classical Dichotomy arises because ... |
of the monetary variables |
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In the Classical model __________ variables do not influence _______ variables |
In the Classical model nominal variables do not influence real variables |
