Chapter 11 Flashcards
(46 cards)
What are the 3 functions of money?
Medium of exchange
Store of value
Unit of account
What is a medium of exchange?
When you give something in exchange for another, such as money
What is a store of value?
It is when you save something to be used later
What is a unit of account?
It is when we measure something’s value
What is metallic money?
Before coins it was necessary to carry metals in bulk . However, the invention of coinage meant that it was no longer necessary to weigh metal at each transaction
Why could coins not always be taken at their face value?
Because consumers could debase their coinage which would drive un-debased money out of circulation
What is Gresham’s law?
The idea that debased money drive un-debased money out of circulation
How did paper money come to be invented?
Gold smith’s would hold gold for customers and give them a banknote in exchange so that, when the customer came back, they would know how much gold is in their account. These paper receipts would then be used for purchase, leading to the invention of paper money
Who issues paper money?
Banks do
Which banks are permitted by law to issue currency?
Central branks
What is fiat money?
It is paper money or coinage that is not backed by nor convertible into anything else that has value because it is “legal tender” by government decree
Money held by the public in the form of deposits with commercial banks is called…
Deposit money
Are bank deposits considered to be money?
Yes
How do banks create money?
By issuing more promises to pay (deposits) than they have cash reserves available to pay out
What is another form of modern money?
Cryptocurrencies
What are the 2 types of institutions that make up a modern banking system?
Central Bank
Financial intermediaries
What is the central bank?
It is the banker to the commercial banking system and to the government
It is the sole money-issuing authority
What do commercial banks refer to?
They refer to financial intermediaries that are deposit accepting and loan granting
What system is known as joint responsibility?
When a central bank has considerable autonomy but its ultimate responsibility for its actions rests with the government
What are the basic functions of the Bank of Canada?
Banker to commercial banks
Banker to the federal government
Regulator of the money supply
What is a commercial bank?
It is a privately owned, profit-seeking institution that provides a variety of financial services, such as accepting deposits from customers and providing loans, mortgages, and other financial products
What do commercial banks do?
It is the essential intermediary in the credit market
It undertakes interbank activities
Multibank systems make use of a clearing house
Commercial banks also act as profit seekers
What is the fractional-reserve system?
It is when commercial banks keep only a fraction of their deposits in cash or on deposit with the central bank
What is the reserve ration?
It is the fraction of its deposits that it holds as reserves
