Chapter 10: The monetary system

Question 1

A barter economy is difficult because it requires what condition?

Answer 1

a double coincidence of wants. between both parties

Question 2

What is money?

Answer 2

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

Question 3

Is most of Bill Gates’ wealth considered money? Why or why not?

Answer 3

No. People don’t usually accept windows OS as forms of payment

Question 4

What are the three functions of money in the economy?

Answer 4

Medium of exchange
Unit of account
Store of value

Question 5

What is a medium of exchange?

Answer 5

An item that buyers give to sellers when they want to purchase goods or services.

Question 6

What is a unit of account?

Answer 6

The yardstick people use to post prices and record debts

Question 7

We=hen we want to measure and record economic value, we use money as the ______

Answer 7

unit of account

Question 8

What is store of value?

Answer 8

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

Question 9

Wealth and money are both examples of

Answer 9

stores of value which transfer purchasing power form the present to the future.

Question 10

What is liquidity?

Answer 10

The ease with which an asset can be converted into the economy’s medium of exchange.

Question 11

What is the most liquid asset?

Answer 11

money

Question 12

Is a Rembrandt painting liquid?

Answer 12

no. hard to very quickly sell and covert to an accepted medium of exchange.

Question 13

What is commodity money?

Answer 13

Money that takes the form of a commodity with intrinsic value.

Question 14

What is the most important example of commodity money? what is an economy that uses it called?

Answer 14

Gold; operating under the gold standard

Question 15

IN the late 1980s USSR, what commodity money was often used?

Answer 15

Cigarettes

Question 16

What is fiat money?

Answer 16

Money without intrinsic value that is used as money because of government decree.

Question 17

What determines acceptance of fiat money?

Answer 17

Social acceptance, expectations that others will accept it in the future.

Question 18

Why is gold useful as a commodity currency?

Answer 18

It is rare, has value in industry, does not kill you, does not disappear or corrode, and can be turned into money by melting it down.

Question 19

What is the money stock?

Answer 19

The quantity of money circulating in the economy.

Question 20

What is currency?

Answer 20

The paper bills and coins in the hands of the public

Question 21

What are demand deposits?

Answer 21

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

Question 22

Why are credit cares not part of the money stock, while debit cards are.

Answer 22

They simply consist of deferring payment. Debit cares give immediate access to the accounts.

Question 23

Canada’s money stock includes not just currency but also _____

Answer 23

deposits in banks and other financial institutions that can be readily accessed to buy goods and services

Question 24

How does the average Canadian adult hold $2791 in currency?

Answer 24

Some is in banks, other held by tax evaders, drug dealers, or other criminals to avoid a paper trail.

Question 25

The Bank of Canada is Canada's

Answer 25

central bank

Question 26

What is the function of a central bank?

Answer 26

to regulate the quantity of money in the economy

Question 27

Before the Bank of Canada act, who issued bank notes?

Answer 27

The department of finance and large commercial banks

Question 28

Who appoints the governors and directors of the Bank of Canada,

Answer 28

the Canadian government

Question 29

Even if the Bank of Canada is controlled by the government, it is largely _____ of it

Answer 29

independent

Question 30

Who owns the main commercial banks in Canada?

Answer 30

Their individual shareholders

Question 31

What happens to profits in the Bank of Canada?

Answer 31

given to the government

Question 32

What are the four jobs of the bank of Canada?

Answer 32

-Issue Currency -Act as a banker to commercial banks -Act as a banker to the CDN government -Manages the money supply

Question 33

What is the money supply?

Answer 33

The quantity of money available in the economy.

Question 34

What is monetary policy?

Answer 34

The setting of the money supply by policymakers in the central bank

Question 35

Where do profits go in a commercial bank?

Answer 35

To the shareholders

Question 36

What is 100 percent reserve-banking?

Answer 36

When a bank only holds money but does not invest it.

Question 37

What is a reserve?

Answer 37

A deposit that banks have received but not loaned out.

Question 38

The assets and liabilities of 100-percent reserve banking are:

Answer 38

Equal.

Question 39

Each deposit in a reserve bank reduces currency and raises deposits by ____

Answer 39

exactly the same amount.

Question 40

If banks hold all deposits in reserve,

Answer 40

they do not influence the supply of money.

Question 41

What is fractional reserve banking?

Answer 41

A banking system in which banks only hold a fraction of deposits as reserves.

Question 42

What is the reserve ratio?

Answer 42

The fraction of deposits that banks hold as reserves.

Question 43

What determines a bank's reserve ratio?

Answer 43

govt regulation and bank policy

Question 44

If a bank has $100 in deposits and $90 in loans, what is the money supply?

Answer 44

$190.

Question 45

When banks hold only a fraction of deposits in reserve, banks _____ money

Answer 45

create

Question 46

The the bank loans out reserves, it creates ___, but not ___.

Answer 46

money; wealth

Question 47

When a bank creates money, it creates ____ for its borrowers

Answer 47

a liability.

Question 48

When there is more supply of money in an economy, it is said to be more _____

Answer 48

liquid

Question 49

What is the money multiplier?

Answer 49

The amount of money the banking system generates with each dollar of reserves.

Question 50

How do you calculate the size of the money multiplier?

Answer 50

The reciprocal of the reserve ratio. R = 1/10; therefore money multiplier is 10.

Question 51

If a bank has 5% money in reserves and loans the rest, what is its money multiplier in the banking system?

Answer 51

20X

Question 52

The higher the reserve ratio,

Answer 52

the less of each deposit banks loan out, and the smaller the money multiplier.

Question 53

What is the reserve ratio in 100% reserve banking?

Answer 53

1. No money is created or lost.

Question 54

What is bank capital?

Answer 54

The resources a bank's owners have put into the institutions

Question 55

The value of owners' equity is, by definition, the value of the bank's assets (reserves, loans and securities)

Answer 55

Minus the value of its liabilities (deposits and debt)

Question 56

What's is leverage?

Answer 56

The use of borrowed money to supplement existing funds for purposes of investment

Question 57

What is the leverage ratio?

Answer 57

The ratio of assets to bank capital

Question 58

If a bank has a leverage ratio of 20, what fraction of the bank's assets are borrowed from debt or deposits?

Answer 58

19/20

Question 59

If a bank has 20 leverage rate, and the value of assets increases by 5%, what is the increase in the vale of the owner's equity?

Answer 59

100% It doubles!

Question 60

If a bank has 20 leverage rate, and the value of assets reduces by 5%, what is the reduction in the vale of the owner's equity?

Answer 60

100%. The bank is now unable to Pay off its debt holders .

Question 61

When a bank cannot pay off its liabilities, it is said to be

Answer 61

insolvent

Question 62

What is a capital requirement?

Answer 62

A government regulation specifying a minimum amount of bank capital.

Question 63

The amount of capital required by a bank depends on...

Answer 63

The kind of assets a bank holds. If safer assets like govt bonds, it requires less capital

Question 64

What is the goal of a capital requirement?

Answer 64

To ensure banks will be able to pay off their depositors (without having to resort to government-provided deposit insurance funds)

Question 65

What is a credit crunch?

Answer 65

Shortage of capital from losses on investments causes banks to reduce their lending

Question 66

How do governments re-establish capital stock in banks?

Answer 66

Paying public funds and making taxpayers temporary owners of many banks

Question 67

Canadian banks were more resilient in the financial crisis because...

Answer 67

they were able to maintain sufficient capital even as they suffered losses on some of their assets.

Question 68

What are the Bank of Canada's three main tools in controlling the money supply?

Answer 68

Open-market operations, changes in reserve requirements, and changes to the overnight rate.

Question 69

What is the bank rate?

Answer 69

The interest rate charged by the Bank of Canada on loans to the commercial banks

Question 70

When a bank does a cheque transfer from one account in another bank, by who does the transaction go through?

Answer 70

The bank of Canada. The bank takes the money from one's demand deposit and adds it to another's demand deposit.

Question 71

What happens if a bank does not have enough money in its demand deposit at the Bank of Canada to execute a money transfer?

Answer 71

It will borrow on overdraft from the bank of Canada

Question 72

What is the operating band?

Answer 72

The Bank of Canada's interest paid to banks that have money in the bank of Canada (4.5%), to 5%, the bank rate paid by borrowers to the Bank of Canada.

Question 73

The operating band sets the pattern for all _______ in Canada

Answer 73

short-term interest rates

Question 74

Commercial banks never need to pay more than the bank rate for short term loans because they can...

Answer 74

always borrow from the Bank of Canada.

Question 75

Commercial banks never er need to accept less than the bank rate for short term loans, because they can always

Answer 75

lend to the Bank of Canada instead

Question 76

What is the overnight rate?

Answer 76

The interest rate on very short-term loans between commercial banks.

Question 77

The overnight rate will always be very close to...

Answer 77

the middle of the operating band. (4.75%)

Question 78

How does changing the bank rate (or overnight rate) affect the money supply?

Answer 78

A higher overnight rate discourages bank from borrowing reserves from the BOC, which reduces the reserves in the banking system and thereby the money supply.

Question 79

When the government want to expand the money supply, it will ____ the overnight rate

Answer 79

lower

Question 80

When was Canada's overnight rate the highest?

Answer 80

Right in 2008.

Question 81

In response to recession, what did the BOC do to the money supply with the overnight rate?

Answer 81

Dramatically decreased it from 4% to 0.25%

Question 82

What are open-market operations? How do they affect the money supply?

Answer 82

The purchase or sale of government of Canada bonds by the Bank of Canada, that either take (sell) or release (buy) money into the economy.

Question 83

When the government of Canada sells bonds, what happens to the money supply?

Answer 83

it decreases. Banks have less reserves and so lend less, creating less money.

Question 84

Open-market operations are normally conducted using ____ ____ government securities

Answer 84

short term

Question 85

What is quantitative easing?

Answer 85

The purchase and sale by the central bank of nongovernmental securities with long maturity terms

Question 86

Governments only use quantitative easing in

Answer 86

extraordinary circumstances

Question 87

What are foreign exchange market operations?

Answer 87

The purchase or sale of foreign money by the Bank of Canada.

Question 88

if the Canadian government buys USD, the purchase increases the supply of

Answer 88

Canadian dollars

Question 89

if the Canadian government sells USD for CAD, the purchase affects the supply of

Answer 89

Canadian dollars. There are less in the economy.

Question 90

What is sterilization? When is it used?

Answer 90

The process of offsetting foreign exchange market operations with open-market operations. It is used so that the exchange-rate changes without affecting the money supply.

Question 91

Describe the sterilization process of Canada increasing the foreign exchange rate?

Answer 91

Using CDN dollars acquired in foreign exchange markets to buy Canadian govt bonds, and thereby put Canadian dollars back into circulation.

Question 92

What are reserve requirements?

Answer 92

Regulations on the minimum amount of reserves that banks must hold against deposits

Question 93

Why does the Bank of Canada not frequently use reserve requirements?

Answer 93

Because it would disrupt the business of banking and it makes it harder for banks to compete with other financial institutions which do not require reserves

Question 94

What are the two main problems of the Bank of Canada attempting to control the money supply?

Answer 94

-It does not control the amount of money that households choose to hold as bank deposits. -It does not control the amount that commercial bankers choose to lend.

Question 95

True or false: The Bank of Canada has a general control over the behaviour of depositors and bankers

Answer 95

Yes. It collects a lot of of data every week and is quickly aware of changes in the money supply, then it can use its levers to control it.