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Statistique > Econ 203_Chap.11 > Flashcards

Econ 203_Chap.11 Flashcards

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1
Q

What are the three functions of money?

A

Medium of exchange, store of value, and unit of account.

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2
Q

Why is money considered an efficient medium of exchange?

A

It facilitates transactions and eliminates the need for barter, which requires a double coincidence of wants. This efficiency allows for specialization and division of labor, enhancing economic productivity.

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3
Q

What characteristics make money an effective medium of exchange?

A

It must be easily recognizable, readily acceptable, have high value relative to weight, be divisible, durable, and difficult to counterfeit.

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4
Q

What is necessary for money to be an effective store of value?

A

Stable purchasing power.

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5
Q

What undermines money’s effectiveness as a store of value?

A

High and variable inflation.

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6
Q

Does money need to be physical to serve its functions?

A

No.

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7
Q

What is hyperinflation?

A

Inflation exceeding 50 percent per month, making money lose its usefulness as a medium of exchange or store of value.

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8
Q

What are the causes of hyperinflation?

A

Government inability to finance expenditures through taxes, leading to massive money printing. Rapid depreciation of currency, causing people to lose confidence and rush to spend money, further accelerating inflation.

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9
Q

What are the consequences of hyperinflation?

A

Money ceases to be accepted, and the price system collapses.

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10
Q

What is required to restore an economy after hyperinflation?

A

Repudiation of the old currency, introduction of a new unit, and comprehensive monetary reform.

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11
Q

What are the common factors in hyperinflations?

A

Significant increases in the money supply. Occurrence during major political upheavals, with doubts about government stability.

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12
Q

What led to the preference for gold and silver as money in early societies?

A

Their limited supply, constant demand, divisibility, and durability.

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13
Q

How did coinage simplify transactions?

A

By guaranteeing the metal content.

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14
Q

What practice led to the milling of coins?

A

Clipping coins.

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15
Q

How did rulers debase coins, and what was the effect of this?

A

By adding base metals, increasing the money supply and causing inflation.

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16
Q

What is Gresham’s Law?

A

When two types of money circulate, the one with higher intrinsic value (good money) is hoarded, while the less valuable (bad money) remains in circulation.

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17
Q

Where did paper money originate?

A

From goldsmiths’ receipts for gold deposits, which became accepted as a medium of exchange.

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18
Q

What does ‘convertible on demand’ mean in the context of early paper money?

A

That paper money was initially backed by gold.

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19
Q

What is fractionally backed paper money?

A

Banks issued more paper money than gold reserves.

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20
Q

What is fiat money?

A

Money not backed by physical commodities but accepted by law as legal tender.

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21
Q

Where does fiat money derive its value?

A

From general acceptability and confidence in its future acceptance.

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22
Q

What is deposit money?

A

Money held by the public in the form of deposits with commercial banks.

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23
Q

How do modern banks create money?

A

By issuing more promises to pay (deposits) than they have cash reserves available to pay out.

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24
Q

What are some examples of cryptocurrencies?

A

Bitcoin, Ethereum, and Ripple.

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25
Are cryptocurrencies considered money?
Their status as 'money' is debated.
26
What are some of the concerns of governments and central banks regarding cryptocurrencies?
Facilitating illegal activities and tax evasion. Potential impact on monetary policy.
27
What are the two main types of institutions in a modern banking system?
A central bank and financial intermediaries.
28
What is the role of a central bank?
A government-owned institution that is the sole money-issuing authority and controls the banking system. It conducts the government's monetary policy.
29
What is the name of Canada’s central bank?
The Bank of Canada.
30
What are financial intermediaries?
Privately owned institutions that serve the general public by accepting deposits from savers and making loans to borrowers.
31
What are commercial banks?
Financial intermediaries that are deposit accepting and loan granting.
32
What are some examples of financial intermediaries?
Commercial banks, trust companies, credit unions, and caisses populaires.
33
When did the Bank of Canada begin operations?
March 11, 1935.
34
What is the organizational structure of the Bank of Canada designed to achieve?
To keep the operation of monetary policy free from day-to-day political influence.
35
What is the relationship between the Bank of Canada and the government?
The Bank of Canada has considerable autonomy, but the ultimate responsibility for the Bank's actions rests with the government. This is known as 'joint responsibility.'
36
What are the basic functions of the Bank of Canada?
Banker to the commercial banks. Banker to the federal government. Regulator of the money supply.
37
What does the Bank of Canada’s balance sheet show?
That it serves as banker to the commercial banks and to the government of Canada, and as issuer of our currency.
38
What are the principal liabilities of the Bank of Canada?
The basis of the money supply.
39
What gives commercial banks the reserves they need to create deposit money?
Deposits of the commercial banks.
40
Where do the Bank’s holdings of Government of Canada securities arise from?
Its operations designed to regulate the money supply.
41
What role did the Bank of Canada play during the COVID-19 pandemic?
Purchasing a large amount of newly issued government securities, thereby expanding the amount of money in the banking system.
42
What is the function of commercial banks?
Privately owned, profit-seeking institutions that provide a variety of financial services, such as accepting deposits from customers and providing loans, mortgages, and other financial products.
43
What role do commercial banks play in the credit market?
Essential intermediaries.
44
What is a clearing house?
Where multibank systems make use of to undertake interbank activities.
45
What is the fractional-reserve system?
A banking system where banks hold only a fraction of their deposits as reserves.
46
What is the reserve ratio?
The fraction of deposits held as reserves.
47
What is the target reserve ratio?
The ideal fraction of deposits a bank aims to hold as reserves.
48
What are excess reserves?
Reserves held above the target level.
49
What are the core elements of any commercial banking system?
Confidence and risk.
50
How do banks earn profits?
From interest on loans and investments, and from wealth-management services.
51
What are a bank's main liabilities?
Deposits.
52
What are a bank’s main assets?
Government securities, loans, and corporate securities.
53
How can the central bank prevent bank runs?
Lending reserves directly on the security of sound but illiquid assets. Buying government securities from commercial banks to increase their cash reserves.
54
What is the CDIC and what does it do?
Canada Deposit Insurance Corporation. It guarantees depositors' money up to $100,000, reducing the likelihood of bank runs.
55
How do banks adjust their actual reserves toward the target level?
By expanding or contracting their loan portfolios.
56
What is the business model of banks?
Banks earn profit from the spread between the low interest rates paid on deposits and the higher interest rates charged on loans.
57
What is the required capital ratio?
Banks must finance a portion of their assets with financial capital from owners, limiting the risk of insolvency.
58
How do commercial banks create money?
By taking deposits and making loans.
59
What are the two simplifying assumptions made to explain money creation?
Banks can invest in only one kind of asset—loans—and they have only one kind of deposit. All banks have the same target reserve ratio, which does not change, and that there is no cash drain from the banking system.
60
What is the impact of a new deposit on a bank's balance sheet?
A new deposit raises the bank’s reserve ratio.
61
What do banks do with excess reserves?
Lend them out.
62
What is the multiplier effect in the banking system?
The process by which a new deposit leads to a larger increase in total deposits throughout the banking system.
63
How is the total change in deposits calculated?
ΔDeposits = ΔReserves/ν, where ν is the target reserve ratio.
64
What is the impact of banks choosing not to lend excess reserves?
No deposit expansion.
65
What is a cash drain?
When people hold a fixed fraction of their bank deposits as cash, reducing the multiple expansion of bank deposits.
66
How is the final change in deposits calculated when there is a cash drain?
ΔDeposits = (New Cash Deposit)/(c + ν), where c is the ratio of cash to deposits that people want to maintain, and ν is the target reserve ratio.
67
What is the money supply?
The total quantity of money that is in the economy at any time.
68
What is the general formula for the money supply?
Money supply = Currency + Bank deposits.
69
What are demand deposits?
Deposits that can be easily transferred.
70
What are savings deposits?
Deposits that historically earned higher interest but were not easily transferable.
71
What are term deposits?
Deposits tied up for a period, with a specified withdrawal date and reduced interest rates for early withdrawal.
72
What are money market mutual funds and money market deposit accounts?
Accounts that earn higher interest and are chequable, though some have withdrawal restrictions.
73
What is the M2 definition of the money supply in Canada?
Currency plus demand and notice deposits at the chartered banks.
74
What is the M2+ definition of the money supply in Canada?
M2 plus similar deposits at other financial institutions.
75
What is near money?
Liquid assets that are easily convertible into money without risk of significant loss of value.
76
What is a money substitute?
Something that serves as a medium of exchange but is not a store of value.
77
What is an example of a money substitute?
A credit card.

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