Week 13: Monetary Policy

Question 1

What are the 4 requirements of money?

Answer 1

1. Serve as a medium of exchange (trading)
2. Act as a unit of account (measuring)
3. Perform as a store of value (accumulating wealth)
4. Acceptable as a means to deferring paying (borrowing)

Question 2

Gresham’s Law

Answer 2

If two types of money are in circulation which are of different intrinsic values but have the same legal value, the money with lower intrinsic value (bad money) tends to circulate more widely than the one with higher intrinsic value (good money).

Question 3

What is commodity money?

Answer 3

money whose intrinsic values is subject to supply and demand

Question 4

What is specie money?

Answer 4

money with an inherent intrinsic value (such as being made/backed by gold or reserves

Question 5

What is fiat money?

Answer 5

money that has no intrinsic value, backed mainly be status and/or belief

Question 6

What are cheques money?

Answer 6

pieces of paper that can be exchanged for cash when redeemed at the issuers bank

Question 7

What are electronic payments?

Answer 7

money transferred electronically

Question 8

The Bank of Canada has authority to:

Answer 8

1. Conduct monetary policy
2. Issue all Canadian banknotes
3. Manage the finances of the federal government
4. Regulate the financial system
5. Act as the lender of last resort

Question 9

What is the operating band?

Answer 9

The range of interest rates between borrowing and lending

Question 10

What is the deposit rate?

Answer 10

Banks can deposit money overnight with the Central Bank and are paid this

Question 11

What is the bank rate?

Answer 11

Banks can also borrow money overnight from the Central Bank and pay this rate.

Question 12

What is the lender of last resort?

Answer 12

the lender that financial institutions turn to when they’re having trouble getting loans.

Question 13

What is the overnight market?

Answer 13

The market where financial institutions can borrow money from each other for one day

Question 14

What are the implications of the role of lender of last resort?

Answer 14

• The lender of last resort can prevent a financial crisis.
• Is a lender of last resort to a broad set of financial institutions.
• The Bank can lose money when it makes loans to failing financial institutions.
• Bailouts can lead banks to take bigger risks.

Question 15

What system does the BoC currently use to set the policy interest rate?

Answer 15

The floor system - target is at the floor of the operating band

Question 16

3 words to describe how inflation should be?

Answer 16

low, stable and predictable

Question 17

What is Fiscal Policy?

Answer 17

the measures the government takes to increase or decrease public spending and taxes.

Question 18

What is Monetary Policy?

Answer 18

the measures the central bank takes to affect the economy by influencing the amount of money in circulation.

Question 19

What is quantitative easing?

Answer 19

a way for the BoC to counter the risk of deflation

Question 20

How does quantitative easing work?

Answer 20

The Central bank buys government bond which raises their price, lowers their bond yield/rate of return and makes it cheaper to borrow mney