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12 Cards in this Set

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What are the functions of money?
Store of value - transfer p.p. from the present to the future.

Unit of account- terms in which prices and debts are recorded.

Medium of exchange- used as legal tender; liquid.
How does money allow for complex transactions?
By avoiding the need for the double coincidence of wants- the unlikely happenstace of two people each having a good that the other wants at the right time and place to make an exchange, as in a barter economy without money.
Contrast fiat money with commodity money.
Fiat money is established by government decree and has no intrinsic value. Commodity money is based on an item of value - typically a gold standard.
What are open-market transactions?
The purchase and sale of government bonds by the Bank of Canada. To increase the supply of money, the Bank uses dollars to buy government bonds from the public.
Describe the five measures of money calculated by the Bank of Canada.
B - Currency, chartered bank deposits at the Bank of Canada.
M1 - Currency in circulation, demand deposits, other chequing deposits at chartered banks.
M2 - M1 + personal savings and nonpersonal notice deposits at chartered banks.
M3 - M2 + fixed-term deposits of firms at chartered banks.
M2+ - M2 + deposits and shares at trust companies, mortgage loan companies, credit unions/caisses pop.
What is the Quantity Equation.
(Money)(Velocity) = (Price)(Transactions)
M x V = P x Y
M x V = Nominal GDP
List the social costs of expected inflation.
Shoeleather cost- inconvenience of reducing money holding.

Menu costs- changing advertised prices.

Variability in relative prices- because firms adjust prices infrequently.

Taxes: levied on nominal returns and not real returns.

Measurement and planning inconvenience.
List the social costs of unexpected inflation.
- Arbitrary redistribution of wealth.
- Hurts those on fixed income.

Risk and uncertainty. Requirment of indexation.
What are the social costs of hyperinflation?
Shoeleather & menu costs- more serious than under moderate inflation.

Relative prices- unable to "shop around" because prices changing so quickly.

Taxes- Delay between assessment and remittance reduces real tax revenue.

Inconvenience- of carrying large quantities of money.
What causes hyperinflation and how is it corrected?
Government deficits (fiscal policy) --> Excessive growth in money supply (monetary policy) --> Fiscal problems become more severe as real tax revenue falls, seigniorage is self-reinforcing --> Corrected by changes in fiscal policy that reduce the need to increase money supply.
What will adjustments in the money supply effect in the economy?
- Interest rates (nominal in LR)
- Exchange rates (nominal in LR)
- Inflation rates
- Real GDP (Y) in the SR
- Unemployment in the SR
List monetary policy tools beginning with the most likely to be used.
1. Bank rate (overnight) adj.
2. Open market ops
3. Foreign exchange
4. Adj gov't deposits in chartered banks
5. Adj reserve ratios of chartered banks