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57 Cards in this Set
- Front
- Back
Money |
Any commodity or token that is generally acceptable as a means of payment |
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3 functions of money |
Medium of exchange Unit of account Store of value |
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Medium of exchange |
An object that is generally accepted in exchange for goods and serives |
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Barter |
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 |
An agreed measure for stating the prices of goods and services |
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Store of value |
Money can be held for a time and later exchanged for goods and services |
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Money in Canada consists of |
Currency Deposits at banks and institutions such as trust and mortgage companies/ credit unions |
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Currency |
Notes and coins held by individuals and businesses M1 and M2 are official measures of currency |
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M1 |
Consists of currency held by individuals and businesses plus chequable deposits owned by individuals and businesses |
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M2 |
Consists of M1 plus all other deposits (non-chequable deposits and fixed term deposits) |
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Are M1 and M2 money |
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 |
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Banking institutions |
Create money and manage the nations monetary payments Depository institutions and Bank of Canada |
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Depository institution |
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 |
3 depository institutions -chartered banks -credit unions and caisses popularies -trust and mortgage loan companies |
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Chartered Bank |
A private firm, chartered under the Bank Act of 1992 to receive deposits and make loans |
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Credit union |
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 |
Similar to credit unions Operate in Quebec |
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Trust and Mortgage Loan company |
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 |
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Bank Goals |
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 |
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 |
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 |
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Bank of Canada |
Canada's central bank - public authority that regulates a nations depository institutions and control the quantity of money |
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Bank of Canada is special in 3 ways |
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 |
- government securities (treasury bills) - last resort loans to banks |
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Bank of Canada's Loans |
- Bank of Canada notes (not coins) - Deposits of banks and the government |
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Monetary base |
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 |
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Open Market Operation |
Changes monetary base by purchasing or selling securities in the open market from or to chartered bank or public |
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Bank of Canada buys securities/ sells securities |
Paid with newly created reserves/ reserves held by banks |
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Open market purchase |
Increases bank reserves |
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Open market sale |
Decreases bank reserves |
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Quantity of deposits that banks can create are limited by |
The monetary base Desired reserves Desired currency holding |
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Size of monetary base limits total quality of money that banking system can create because |
1. Banks have desired reserves 2. Households and firms have desired currency holdings |
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Desired reserve ration |
Ratio of banks reserves to total deposits that a bank plans to hold Desired ratio exceeds required reserve ratio |
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Currency drain |
Leakage of reserves into currency Total quality of money increases, loans paid, deposits increase, people hold onto currency |
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Currency drain ratio |
Ratio of currency to deposits |
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Money creation process |
Bank of Canada buys securities and pays for them with newly created reserves |
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Excess reserves = |
Actual reserves - Desired reserves Banks now have more reserves but the same amount of deposits |
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Money multiplier |
Ratio of change in the quantity of money to the change in the monetary base |
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Quantity of money created depends on desired |
Reserve ratio and currency drain ratio. The smaller these ratios, the larger the multiplier
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Influences on money holding |
Price level Nominal interest rate Real GDP Financial innovation |
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Real money = |
Nominal money/Price level Nominal money rises at the same rate as price level |
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Nominal Interest Rate |
Opportunity cost of holding wealth in the form of money rater than an interest bearing asset |
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Rise in nominal interest rate |
Decreases quantity of real money people plan to hold |
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Increase in real GDP |
Increases spending, increases quantity of real money that people plan to hold |
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Financial innovations |
Lower the cost of switching between money and interest bearing assets, decreases the quantity of real money that people plan to hold
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Tech advances include |
ATM Credit and debit cards Ebanking |
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Demand for money |
Relationship between quantity of real money demanded and nominal interest rate. All other influences remain the same. |
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Decrease/ increase in GDP/ inovation |
Shift leftward/ rightward |
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Money market equilibrium occurs when |
the quantity of money demanded equals the quantity supplied Adjustments vary between short and long run |
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Short run equilibrium |
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 |
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Long run equilibrium |
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 |
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Quantity theory of money |
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 |
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Velocity of circulation |
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 |
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Equation of exchange |
MV=PY Quantity of money* velocity =Price level * GDP |
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Inflation rate = |
money growth rate - real GDP growth |
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Increase in the quantity of money = |
A/(1-L) A- initial increase in reserve L - what is loaned out |
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Money multiplier = |
=quantity of money/ monetary base =(Deposits + Currency)/(Currency + Reserves) =(D + C/D)/(C/D + R/D) |