Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
12 Cards in this Set
- Front
- Back
|
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 |
