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macroeconomics > chapter 10 > Flashcards

chapter 10 Flashcards

1
Q

what is money?

A

the set of assets in an economy that people use to buy goods and services from other people

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2
Q

what are the 3 main functions of money?

A

medium of exchange
unit of account
has store value

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3
Q

what distinguishes money from other assets in the economy

A

the 3 functions;
medium of exchange
unit of account
store of value

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4
Q

what is a medium of exchange?

A

an item that buyers give to sellers when they want to purchase a good or service

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5
Q

what is a unit of account?

A

a yardstick people use to post prices and record debt

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6
Q

what is a store of value?

A

an item that people can use to transfer purchasing power from the present to the future

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7
Q

what is wealth?

A

the total of all store of value including both monetary assets and non monetary assets

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8
Q

what are 3 monetary assets?

A

money
chequing account
savings account

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9
Q

what are 2 non monetary assets?

A

art
pottery

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10
Q

what is liquidity?

A

the ease with which an asset can be converted in to the economys medium of exchange

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11
Q

what is an asset that is very liquid?

A

a chequing account

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12
Q

what is an asset that is not very liquid?

A

art

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13
Q

can art be used as a store of value?

A

yes it can, but it is not very liquid

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14
Q

what are the 2 forms that money can take?

A

commodity money
fiat money

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15
Q

what is commodity money?

A

money that takes the form of a commodity with intrinsic value

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16
Q

what is intrinsic value?

A

something that would have value even if it was not used for money

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17
Q

what is an example of commodity money?

A

cigarettes

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18
Q

how are cigarettes an example of commodity money?

A

cigarettes were commonly used by WWII prisoners-of-war to trade goods and services. they were used as a store of value, unit of account and a medium of exchange

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19
Q

what is the gold standard?

A

refers to Money that is more convertible to gold

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20
Q

what is fiat money?

A

money without intrinsic value that is used as money because government decree

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21
Q

what is an example of fiat money?

A

the Canadian dollar (paper money)

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22
Q

why is the canadian dollar (paper money) fiat money?

A

because it is used because the canadian government said that it is valid money

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23
Q

what does the success of a countries fiat money depend on?

A

how the monetary system is regulated
expectations
social convention

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24
Q

in that absence of using money for transactions what would people rely on?

A

a barter system to exchange goods or services

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25
Q

how does the barter system work to exchange goods and services?

A

it would require the trade of items with immediate value, this value of items is based on individual needs

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26
Q

why can the bater system be inefficient when allocating scarce resources?

A

because for the exchange to take place it requires the double-coincidence of wants

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27
Q

what is the double-coincidence of wants?

A

when 2 people would have a good or service that the other person wants

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28
Q

what is the money stock?

A

the quantity of currency circulating in the economy and other liquid instruments in a country that data can measure

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29
Q

what are the 2 main measures for the stock of money in the economy?

A

currency
demand deposits

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30
Q

what is currency?

A

the paper bills and coins in the hands of the public

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31
Q

what are demand deposits?

A

the balances in the bank accounts that depositors can access on demand by writing a cheque or using a debit card

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32
Q

what is M1+ (money supply 1)?

A

most liquid money supply

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33
Q

what is in M1+?

A

currency and demand deposits

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34
Q

what is M2 (money supply 2)?

A

M1+ and some not so liquid financial assets

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35
Q

what are some examples of not so liquid assets in M2?

A

time deposits and savings

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36
Q

what do central banks focus on when assessing monetary policy and the current amount of money in circulation?

A

they focus on near-money assets that are quickly convertible

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37
Q

who issued bank notes before the bank of canada was created?

A

bank notes were issued by the department of finance and large commercial banks

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38
Q

why did the department of finance and large commercial banks issue bank notes before the bank of canada?

A

because canada was on the gold standard, meaning that the currency was backed by gold and the department of finance and large commercial banks had enough gold reserves to back the bank notes

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39
Q

what lead to the collapse of the gold standard?

A

the Great Depression, this created the need to control the quantity of fiat money. this ultimately led to the bank of canada act

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40
Q

when did the bank of canada act happen?

A

1935

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41
Q

what was the bank of canada act?

A

the act that created the bank of canada to control the quantity of fiat money

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42
Q

who appointed the management board of directors for the Bank of Canada?

A

the minister of finance

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43
Q

what makes up the board of directors at the Bank of Canada?

A

a governor
a senior deputy governor
12 directors

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44
Q

how long were the terms of the board of directors at the Bank of Canada?

A

governor has a 7 year term
senior deputy governor had a 7 year term
the 12 directors each had 3 year terms

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45
Q

who controls the management structure of the bank of canada?

A

the federal government

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46
Q

why do the governor and the senior deputy governor of the bank of canada have only 7 year terms?

A

to insulate the bank of canada from those short-term political pressures when evaluating monetary policy

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47
Q

what are the 4 main functions of the Bank of Canada?

A

issue currency
be the banker for commercial bankers
be the banker for the federal government
control the money supply

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48
Q

how is the Bank of Canada the lender of last resort?

A

during times of liquidity crisis the Bank of Canada can provide emergency loans to lenders (commercial banks) that cannot borrow from anywhere else

49
Q

how does the bank of Canada control the money supply?

A

through monetary policy

50
Q

what is money supply?

A

the quantity of money Available in the economy

51
Q

what Is monetary policy?

A

the setting of the money supply by the policy makers in the central bank

52
Q

even though the bank of canada alone is responsible for monetary policy, who do they control the money supply through?

A

the entire banking system

53
Q

what are reserves?

A

the deposits that the bank recives that cannot be loaned out

54
Q

what is 100 percent reserve banking?

A

when 100 percent of the deposits that a bank gets goes in to reserves

55
Q

what would a balance sheet look like for a bank that is doing 100 percent reserve banking got a deposit of 100 dollars?

A

the banks liabilities would be just 100 dollars worth of deposits and the banks assets are 100 dollars worth of reserves

56
Q

what is fraction-reserve banking?

A

a banking system in where banks hold only a fraction of its deposits as reserves

57
Q

what is a reserve ratio?

A

the fraction of deposits the bank holds as reserves

58
Q

what would a balance sheet look like for first-national bank that is doing money creation with fractional-reserve banking and a reserve ratio of 10% got a deposit of 100 dollars?

A

first-national banks liabilities would be 100 dollars worth of deposits and the assets would be 10 dollars worth of reserves and 90 dollars worth of loans

59
Q

does the creation of money stop with the first bank national bank?

A

no

60
Q

how can the creation of money continue at another bank?

A

If the borrower of the 90 dollar loan from first-national bank buy something from someone who banks at second national bank, and the cycle of 10% reserve and 90% loan continues to create money

61
Q

when fractional reserve banking is happening how does the impact the money supply?

A

the money supply= initial deposit + the loans that the other banks give out

62
Q

what is the money multiplier?

A

the amount of money in the banking system generated with each dollar of reserves

63
Q

the money multiplier is a reciprocal of what?

A

the reserve ratio

64
Q

what is the money multiplier formula?

A

1 divided by the reserve ratio

65
Q

if the money supply changed form 100 dollars to 1000 dollars, what is the money multiplier equal to?

A

the money multiplier is equal to 10

66
Q

bank’s financial assets extend beyond demand deposits (reserves), what else can they include?

A

other investments like stocks and bonds of various companies

67
Q

what can banks use besides loans to generate their profit owners?

A

stocks and bonds

68
Q

what is bank capital?

A

the resources that the bank owners have contributed into the bank

69
Q

what are 2 examples of bank capital?

A

equity capital
retained earnings

70
Q

what do banks rely on to fund their investments?

A

leverage

71
Q

what is leverage?

A

the use of borrowed funds (debt) to increase the potential return on investment

72
Q

what is an example of banks using leverage to increase the potential return on investment?

A

say a bank has 50 dollars of bank capital, and they have an investment opportunity that returns 5%. if they borrow 1000 dollars and use leverage they make 50 dollars at 5% ROI instead of using the banks capital and only make 2.50

73
Q

what is a leverage ratio?

A

the ratio of debt to other financial metrics

74
Q

what is the equity multiplier?

A

the ratio of assets to bank capital

75
Q

does the equity multiplier/ leverage multiplier include debt?

A

it is included indirectly through the banks assets which are financed through debt or equity

76
Q

what is the equity multiplier/ leverage ratio formula?

A

total assets devided by bank capital
OR
(total debt+ total equity) divided by bank capital

77
Q

what does a high leverage ratio mean?

A

it means that the bank is using a large amount of debt to finance its assets

78
Q

if the leverage ratio is 20, what does that mean?

A

means that every dollar the bank owners are contributing, the bank has 20 dollars of assets

79
Q

what does the leverage ratio indicate?

A

it indicates how much debt it is using to finance its assets

80
Q

are reserves included in the money supply?

A

no

81
Q

if the bank is unable to pay off its holders and depositors what can that lead to?

A

bankruptcy

82
Q

why do central banks bail out banks?

A

so they are able to pay out their customers in a crisis but also so banks are not scared of making loans to stimulate the economy

83
Q

what are capital requirements?

A

a government regulation that sets the minimum amount that banks are required to hold

84
Q

when bank capital grows what get smaller?

A

the leverage ratio

85
Q

if a bank is doing 10% reserve banking, can they keep more than 10% in reserves?

A

yes

86
Q

what minimizes the risk that a bank can go bankrupt?

A

capital requirements

87
Q

what are the 3 tools the bank of Canada has for monetary control?

A

changing policy rate
open-market operations
changing reserve requirements

88
Q

what is another name for the policy rate?

A

the overnight rate or target rate

89
Q

what is the bank rate?

A

the interest rate charged by the bank of canada on loans to commercial banks

90
Q

what are 2 other names for the bank rate?

A

federal fund rate (US)
discount rate

91
Q

what is the deposit rate?

A

the interest rate on bank of canada demand deposits for commercial banks

92
Q

if a commercial bank deposits money at the bank of canada, what interest rate do they get?

A

the deposit rate

93
Q

if a commercial bank takes out a loan at the bank of cananda, what interest rate do they get?

A

the bank rate

94
Q

what is the operating band?

A

the range between the deposit rate and the bank rate

95
Q

can a provincial bank take out a loan from the bank of canada?

A

no, only federally licensed banks can take out loans from the bank of canada

96
Q

if the deposit rate is 4.5% and the bank rate is 5%, what will the policy/overnight rate be?

A

somewhere in-between 4.5% and 5%

97
Q

why do banks set their policy/overnight rate in-betwen the bank rate and deposit rate?

A

to make a profit

98
Q

what determines the interest rate that customers get?

A

the operating band

99
Q

what is the standard operating band?

A

normally the operating band is about 0.5% (the difference between the deposit rate and the bank rate is 0.5%)

100
Q

what is the policy rate?

A

the interest rate on short-term loans between commercial banks

101
Q

does the bank of Canada directly alter the policy/ overnight rate?

A

no, they alter it indirectly

102
Q

how does the bank of cananda indirectly alter the policy/ overnight rate?

A

the bank of canada can alter the policy rate through changing the deposit rate and the bank rate and that would change the interest rate that commercial banks offer to customers

103
Q

if the bank of cananda changes the bank rate, how will that alter the policy/ overnight rate?

A

it will cause the policy rate to change by the same amount as the BOC changed the bank rate

104
Q

how can the bank of cananda raise the policy rate?

A

by raising the bank rate

105
Q

how can the bank of Canada lower the policy rate?

A

by lowering the bank rate

106
Q

if the bank of cananda raises the bank rate how will that impact money supply?

A

it will cause the policy rate to raise, and will decrease the money supply

107
Q

if the bank of cananda lowers the bank rate how will that impact the money supply?

A

it will cause the policy rate to lower, and will increase the money supply

108
Q

what is open-market operations?

A

the purchase or sale of government bonds by the Bank of Canada

109
Q

how would the bank of canada use open market operations to increase the money supply?

A

the bank of cananda would buy government bonds from the public, increasing the money supply

110
Q

how would the bank of cananda use open market operations to decrease the money supply?

A

the bank of cananda would sell government bonds to the public, reducing the money supply

111
Q

what is quantitative easing?

A

the purchase or sale of government or non-government securities

112
Q

what are reserve requirements?

A

the regulation of the minimum amount of reserves that banks are required to hold against deposits

113
Q

how would changing reserve requirements decrease money supply?

A

increase in reserve requirements would lead to higher bank reserves leading to higher reserve ratio and a decrease in the money multiplier, ultimately reducing how much money banks can loan out and decreasing the money supply

114
Q

how would changing reserve requirements increase money supply?

A

decrease in reserve requirements would lead to lower bank reserves leading to lower reserve ratio and an increase in the money multiplier, ultimately increasing how much money banks can loan out and increasing the money supply

115
Q

what is the least common way to control the money supply?

A

changing reserve requirements

116
Q

what are the 2 problems in controlling the money supply?

A

the bank of cananda does not control the money households choose to hold as deposits

the bank of cananda does not control the amount of money the banks loan out as a percentage of its reserves

117
Q

why do the 2 problems in controlling the money supply occur?

A

because ultimately the money supply depends on the behaviour of depositors and banks because the bank of cananda can only control so much

118
Q

what is the formula to calculate bank capital?

A

bank capital= assets-deposits-debt

macroeconomics (13 decks)

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