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Flashcards in Chapter 11 Deck (21)
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1
Q

Money

A

is anything that is generally accepted in exchange for goods or services.

2
Q

Four functions of money

A

Medium of exchange
Measure of value
Store of value
Money as a means of deferred payment

3
Q

Currency

A

consists of coins and paper notes used in the trading of goods and services and the payment of debts.

4
Q

Legal tender

A

Legal tender refers to coins and paper notes officially declared to be acceptable for the settlement of debts incurred in financial transactions.

5
Q

Demand deposits

A

are balances in bank accounts that can be accessed on demand.

6
Q

Savings deposits

A

are funds that cannot be used directly for payment.

7
Q

Liquidity

A

refers to the ease with which one asset can be converted into another asset or into goods and services.

8
Q

How is the money supply measured?

A

M2:

M2+:

9
Q

M2:

A

This is the most common definition of the money supply, which consists of currency held outside chartered banks plus demand and savings deposits at chartered banks.

10
Q

M2+:

A

This is a broader definition of the money supply, which consists of M2 plus demand and savings deposits at trust companies, mortgage loan companies, credit unions, caisses populaires, and other financial institutions.

11
Q

What types of financial institutions exist in Canada?

A

Financial intermediaries in Canada can be classified into three general categories:
depository institutions
contractual savings institutions
investment intermediaries

12
Q

Fractional reserve system

A

a system in which banks hold reserves equal to some fraction of their original deposits.

13
Q

Assets:

A

things of value that the bank

owns (cash reserves, bonds, buildings, etc.).

14
Q

Liabilities:

A

financial obligations that

the bank has to other people.

15
Q

Capital:

A

the difference between a bank’s assets and its liabilities constitutes the bank’s capital.

16
Q

Desired reserve ratio

A

the percentage of deposits that a bank chooses to hold as cash reserves.

17
Q

Excess reserve:

A

cash reserves that are in excess of desired reserves.

18
Q

Leverage

A

the use of borrowed money for the purpose of investing.

19
Q

Leverage Ratio:

A

the ratio of total assets to bank capital.

20
Q

Multiple expansion effect:

A

a given volume of bank reserves creates a multiplied amount of money.

21
Q

What is the money multiplier?

A

The money multiplier is equal to 1 divided by the desired reserve ratio.
The higher the desired reserve ratio, the smaller the money multiplier.
Using the money multiplier, we can calculate the potential amount of new money that can be created from an initial deposit.
Potential money creation = initial deposit X money multiplier