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23 Cards in this Set

  • Front
  • Back

What is the main purpose of money?

Money's main purpose is as a unit of account.

How is a system that uses money better than a barter system?

In a barter system, you have to figure out a barter ratio for every transaction. In a monetary system, each good has a price.

It is much simpler.

What does it mean when we say money is useful as a store of value?

We are talking about how twenty dollars today will be twenty dollars tomorrow, whereas something like food will not be worth the same amount after it goes bad.

What is our definition of money (the M1+)?

What are some examples of money?

Money is any medium of exchange that is readily available.

Some examples are:

-Cash in public pockets -'Currency in circulation'

-Money inside banks -Demand deposits

-Savings: 'debit' -Chequing

How does the M1+ compare to other definitions of money?

It is the narrowest definition of money.

It only includes currency in circulation, and demand deposits.

These two are the amount that we are 'actually holding'. The 'stock' of money.

A thousand years ago, what did people use for money?

These things have value outside of their use as money. What do we call these things?

They used salt often, they also used gold.

They have intrinsic value, so we call them 'commodity money'.

What are the prerequisites for a commodity to be used as money?

How does gold hold up when we look at it through this lens?

-They must have intrinsic value - be widely accepted

-Must be easily transportable

-Must be divisible and durable

-Counterfeit proof - theft proof

Gold is durable and has intrinsic value, but the others, eh...

How did we develop money out of gold?

People took money to the goldsmith, and got a certificate. The certificate solves all of the major issues with the gold.

The certificate is the beginning of 'paper money'.

The paper is backed by gold, so people accept it.

From certificates backed by gold, how did we transition to today's money?

We transitioned to non-convertible money, and legal tender, by government decree, must be accepted to settle transactions.

A bank will keep a reserve of money. Why?

What are these called?

When the bank takes deposits, they must make sure that it can satisfy the withdrawal needs of its depositors.

These are called fractional reserves, because they don't hold on to all of the people's money.

What do fractional reserves allow for, in a worst case scenario?

What happens to the bank in this situation?

They allow for a 'bank run' - when a lot of people take out their money at the same time.

This is fatal for the bank.

If one bank is at risk of a bank run, is this good or bad for the other banks?

It is bad - we say that bank runs are 'contagious'.

How do we avoid contagious bank runs?

What does this response mean?

We have deposit insurance.

This is money you pay to the government. If you have up to 100k at the bank, the government will pay your money back.

What is the 'default risk' of loaning money?

When does this occur?

What do we call it when this occurs?

You risk not getting that money back.

This happens whenever assets are less than liabilities -> a negative owners' equity.

This is insolvency.

We know that banks need to keep an adequate amount of capital, as a buffer for going bankrupt.

What percent do we know is not enough?

What reserve ratio is desired?

We know that eight percent is not enough.

Ten percent is the desired amount.

What are the functions of the central bank?

The central bank is responsible for issuing paper money and coins.

What must be considered when issuing the money?

The cost effectiveness of the money used.

This is why we have loonies and toonies - coins are much more durable than paper.

For whom is the central bank a banker?

The central bank acts as a banker for the federal government.

It is also a banker for all of the commercial banks.

The central bank is the 'lender of the last resort'. What does this mean?

When the commercial banks absolutely need funds and can't get them from anywhere else, they get them from the central bank.

Why do we say the central bank is a regulator?

Because it regulates the banking industry.

When was the Bank of Canada chartered? What was it, originally?

It was chartered in 1935.

Originally, when was operating in the 50s, it acted as both a commercial bank and as a central bank.

What is the situation in the USA regarding the commercial banks and the federal reserves?

What analogy did the professor compare this to?

All banks in the States own shares of the federal reserves.

He said that this is similar to the players owning the referee.

What are settlement accounts?

Accounts that the commercial banks have with the Bank of Canada, that money is tranferred between to settle transactions.