Chapter 4 Flashcards
How does the BoC increase money supply?
The BoC will buy government bonds and security from public
How does the BoC decrease money supply?
The BoC will sell government bonds and security to the public
What is fiat money?
No intrinsic value (ie. paper currency)
What is commodity money?
Money with intrinsic value (ie. gold coins)
What sorts of money supply included in M1?
currency (notes+coins) and demand deposits
What is the money supply included in M2?
M1 + personal savings and non-personal notice deposits located in chartered banks
What is the money supply included in M3?
M2+ chartered bank non-personal term depasits and foreign currency deposits of Canadians residents
What is the money supply included in M2+?
M2+ all deposits at non-bank deposit taking institutions (trust, mortgage and loan companies, credit unions and caisse populaires), money market mutual funds and individual annuities @ life insurance companies
What is velocity?
The number of times the average dollar coin changes hands in a given period of time
V = T/M
V - velocity
T - value of all transactions
M - money supply
What is the quantity equation of money?
MV = PY
P - price of output (GDP deflator)
Y - quantity of output (real GDP)
PY - value of output nominal GDP
What is the money demand equation?
(M/P)^d = kY
k = how much money people wish to hold for each dollar of income (inverse relationship with V)
What does pi symbolize?
inflation rate
What is the Fisher equation?
i = r + pi
i - nominal interest rate
r - real interest rate
pi - inflation
What is real interest rate?
The cost of borrowing or the return to lending measured in physical units
What is the money demand function?
(M/P)^d = L(i,Y)
i = nominal interest rate (opportunity cost of holding money); inversely affects money demand
