March 12 & 17

Question 1

3 characteristics of money

Answer 1

1. medium of exchange
2. store of value
3. unit of account

Question 2

money as a medium of exchange - if there was no money…

Answer 2

goods would have to be exchanged in a system of BARTER

barter = very inefficient due to the double coincidence of wants

Question 3

money as a store of value: without inflation, money…

Answer 3

without inflation, money RETAINS ITS VALUE WELL

Question 4

metallic money

Answer 4

1. before invention of coins, was necessary to CARRY THE METALS in BULK
2. invention of coinage eliminated need to WEIGH the metal with each transaction
3. but coins often couldn’t be taken at face value, because of practice of CLIPPING THIN SLICE off the edge of the coin

Question 5

Gresham’s law

Answer 5

theory that ‘BAD’ (or debased/clipped/mixed) money drives ‘GOOD’ money out of circulation

Question 6

paper money

Answer 6

1. GOLDSMITHS possessed secure safes, and public began to DEPOSIT with them for safekeeping
2. goldsmiths would GIVE DEPOSITORS RECEIPTS promising to return the gold on demand
3. if goldsmiths were known to be reliable, buyers began to TRANSFER the goldsmith’s receipt when MAKING A PURCHASE
4. this transferring of paper receipts rather than gold was essentially the INVENTION OF PAPER MONEY

Question 7

bank notes

Answer 7

early paper money

later became issued by banks

were BACKED by PRECIOUS METAL and convertible on demand into this metal

Question 8

early on, goldsmiths and banks discovered…

Answer 8

discovered that it wasn’t necessary to keep one ounce of gold in the vaults for every claim to one ounce circulating as paper money

currency is FRACTIONALLY BACKED by the reserves

Question 9

as time went on, what happened to currency (notes and coins) issued by private banks?

Answer 9

they became less common

because CENTRAL BANKS TOOK CONTROL over issuing currency

eventually, ONLY central banks were permitted by law to issue currency

Question 10

nowadays, are private banks allowed to issue currency?

Answer 10

nope

only the central bank

Question 11

what is our money today called?

Answer 11

fiat money

Question 12

fiat money

Answer 12

paper money or coinage that’s NEITHER BACKED BY NOR CONVERTIBLE into anything else but is decreed by government to be LEGAL tender

1. if fiat money is generally acceptable, it’s a medium of exchange
2. it its purchasing power remains stable, its a satisfactory store of value
3. if both the above are true, its a satisfactory unit of account

Question 13

deposit money

Answer 13

money held as deposits with commercial banks and other financial institutions

bank deposits = an important part of the money supply

Question 14

how do banks create money?

Answer 14

by issuing more PROMISES TO PAY (deposits) than they have in cash reserves

Question 15

cryptocurrencies

Answer 15

another form of money

bitcoin, ethereum, ripple

Question 16

most banking systems have which two components

Answer 16

1. a central bank
2. many financial intermediaries

Question 17

3 main characteristics of the central bank

Answer 17

1. acts as a bank to the banking system
2. usually government owned
3. the sole money-issuing authority

Question 18

when was the Bank of Canada created?

Answer 18

1935

Question 19

organization of the BoC is designed to do what?

Answer 19

to keep the operation of monetary policy free from day-to-day political influence

BoC has CONSIDERABLE AUTONOMY, but the ULTIMATE responsibility for the Bank’s actions rests with the government

formally accountable to the Minister of Finance and Parliament

Question 20

joint responsibility system

Answer 20

BoC has considerable autonomy but is formally accountable to the Minister of Finance and Parliament

Question 21

4 basic functions of the BoC

Answer 21

1. act as a banker to commercial banks
2. act as fiscal agent of the federal government
3. regulate the money supply
4. regulate, support, monitor financial markets

Question 22

what did the gov of Cad do in early 2020?

Answer 22

they issued a massive amount of NEW SECURITIES to provide FINANCIAL RELIEF to unemployed workers and businesses whose revenue had collapsed

BoC played important role by PURCHASING a large amount of these newly issued securities, thereby EXPANDING the amount of MONEY in the banking system

Question 23

commercial bank

Answer 23

privately owned, profit seeking institution

provides variety of financial services

important FINANCIAL INTERMEDIARIES - crucial for the smooth operation of credit markets

Question 24

when we say commercial banks are financial intermediaries, what do we mean?

Answer 24

means they ACCEPT DEPOSITS and PROVIDE CREDIT

are crucial to the smooth operation of credit markets

Question 25

balance sheet of commercial bank: categories

Answer 25

assets: 1. reserves (R) 2. government securities (G) 3. loans (L) liabilities: 1. deposits (D)

Question 26

liabilities

Answer 26

something we must respond to ie. deposits - we must respond to demand for its withdrawal

Question 27

balance sheet of central bank: categories

Answer 27

assets: 1. government securities (G) liabilities: 1. C (notes in circulation) 2. D (reserves)

Question 28

banks' cash reserves are normally quite...

Answer 28

small because only a small fraction of depositors want their money at a time

Question 29

reserve ratio

Answer 29

the fraction of its deposit liabilities that it actually holds as reserves ^ either in vault cash or deposits with the central bank

Question 30

target reserve ratio

Answer 30

the fraction of deposits the bank wants to hold as reserves ^ this is the optimal ratio ^ below it is risky, above it is unnecessary

Question 31

Canadian banking system as a fractional-reserve system...

Answer 31

in March 2019, they held less than 1% of their deposits in resserves

Question 32

excess reserves

Answer 32

any reserves in excess of target reserves these are central in the process of MONEY CREATION

Question 33

simplifying assumptions in money creation by the banking system

Answer 33

1. banks invest only in LOANS (no gov securities) 2. there are only DEMAND DEPOSITS 3. there's a FIXED TARGET RESERVE RATIO 4. there's NO CASH DRAIN from the banking system (no withdrawals)

Question 34

what's a new deposit?

Answer 34

a deposit of cash that's NEW to the BANKING SYSTEM 3 examples: 1. an individual may IMMIGRATE to Canada 2. an individual who had cash STASHED UNDER THE BED decides to deposit into bank account 3. BoC purchases a GOVERNMENT SECURITY from an INDIVIDUAL/FIRM

Question 35

a single new deposit begins...

Answer 35

a long sequence of deposit creation

Question 36

with a target ratio of 20%, a new deposit of $100 creates...

Answer 36

a total expansion of deposits of $500 (because initial $100 - $80 is lent out and $20 is kept at reserves - the $80 re-enters as investment in loans - then the $80 is spent and received by a second-round bank in new deposits - new bank expands its loans by $64 etc etc etc)

Question 37

with no cash drain, a banking system with a target reserve ratio of v will change its deposits by...

Answer 37

1/v times any change in reserves (the new deposit) change in deposit = (1/v) (change in new deposits)

Question 38

difference between new deposits and addition to reserves

Answer 38

will always be NEW LOANS

Question 39

what dampens the deposit-creation process?

Answer 39

if households HOLD A FRACTION of their deposits in CASH ^ cash drain ^ introduces the CURRENCY-DEPOSIT RATIO

Question 40

if c is the currency-deposit ratio, the final change in deposits is given by:

Answer 40

change in deposits = (1/(c+v) (new cash deposit) ^ accounts for the cash drain

Question 41

c and v

Answer 41

c = currency-deposit ratio (in case of a cash drain) v = target reserve ratio

Question 42

example: currency-deposit ratio is 5%, reserve-deposit ratio is 1%. $100 cash injection will eventually lead to a total change in deposits equal to...

Answer 42

change in deposits = (1/(c+v)) (new cash deposit) change in deposits = 1/(0.05+0.01)($100) = $1666.67

Question 43

money supply

Answer 43

total quantity of money that's in the economy at any time several definitions of money

Question 44

generally, money supply equals

Answer 44

currency + deposits

Question 45

long standing distinction between money and other highly liquid assets

Answer 45

1. money was a medium of exchange that DID NOT EARN INTEREST 2. other assets earned interest, but were NOT a MEDIUM OF EXCHANGE but today, the distinction is very BLURRED

Question 46

M2 definition of money

Answer 46

currency + chequable and non-chequable deposits held at the chartered banks

Question 47

M2 versus M2+ verus M3 etc

Answer 47

difference in the types of deposits included in the definition - become broader as the numbers increase come to include less liquid deposits

Question 48

near money

Answer 48

1. STORE OF VALUE 2. READILY CONVERTED into a medium of exchange ie. short term bonds ie. term deposits

Question 49

2 types of near money

Answer 49

short term bonds term deposits

Question 50

money substitutes

Answer 50

1. serve as a TEMPORARY MEDIUM OF EXCHANGE but are not a store of value ie. credit cards

Question 51

choosing a measure of money

Answer 51

1. no single timeless or best definition of money 2. new financial assets = continually being developed that serve some of the functions of money