Chapter 11 Flashcards
3 functions of money explained
- medium of exchange
- makes it easier to buy and sell things
- intermediary to facilitate transactions, replaces system of barter - Unit of account
- common unit of account, allow measurement and comparison of value of different goods - Store of value
- money retains its value over time, allowing people to keep their purchasing power
BOC basic functions
- act as banker to commercial banks
- act as fiscal agent of the federal government
- regulate money supply–»monetary policy
- regulate, support, monitor financial markets
How is called the reserve system here
fractional reserve system
Assumptions of the banking chapter
- banks invest only in loans
- there are only demand deposits
- fixed traget reserve ratio
- no cash drain from banking system
What is a new deposit, give an example
- deposit of cash that is new to the commercial banking system
-ex: immigrant
By how much do deposits in the system change
change in deposits= (1/V)*change in reserves
V is the reserve ratio
What is cash drain, how does it influence the money creation
When households hold a fraction of their deposits in cash, the deposit creation process is dampened, this is cash drain and it changes the equation to:
-Change in deposits= (1/(V+c))*new cash deposit
c is the currency deposit ratio
General equation for money supply
Currency+deposits
What is M2?
M2= currency + chequable and non-chequable deposits held at the chartered banks
What is M2+
M2+ similar dep that are in non-chartered banks
What’s near money
- assets that are a store of value and are readily converted into a medium of exchange
- short-term bonds
- term deposits
What are money substitutes?
- things that serve as a temporary medium of exchange but are not store of value
ex credit cards
