Macroeconmics - Chapter 11 - The Menotary System

money

the set of assets in an economy that peopleregularly use to buy goods and services fromother people

medium of exchange

an item that buyers give to sellers whenthey want to purchase goods and services

unit of account

the yardstick people use to post prices andrecord debts

store of value

an item that people can use to transfer purchasingpower from the present to the future

liquidity

the ease with which an asset can be converted into theeconomy's medium of exchange

commodity money

money that takes the from of a commoditywith intrinsic value

fiat money

money without intrinsic value that is usedas money because of government decree

currency

the paper bills and coings in the hands of thepublic

demand deposits

balances in bank accounts that depositors canaccess on demand by writing a cheque or usinga debt card

Bank of Canada

the central bank of Canada

central bank

an institution designed to regulate the quantityof money in the economy

money supply

the quantity of money available in the economy

monetary policy

the setting of the money supply by policymakers in the central bank

reserves

deposits that banks have recieved but not loanedout

fractional-reserve banking

a banking system in which banks hold onlya fraction of the deposits as reserves

reserve ratio

the fraction of deposits that banks hold asreserves

money multiplier

the amount of money the banking system generateswith each dollar of reserves

open-market operations

the purchase or sale of government bonds bythe Bank of Canada

foreign exchange market operations

the purchase or sale of foreign money by theBank of Canada

sterlization

the process of offsetting foreign exchange marketoperations, so that the effect of the money supplyis cancelled out

reserve requirments

regulations on the minimum amount of reservesthat banks must hold against deposits

bank rate

the interest rate change by the bank of Canada on loans tothe commercial banks

overnight rate

the interst rate on very short-term loansbetween commercial banks

IN THE NEWS

Money on the island of Yap

Fixed Assets, or Why a loan in Yapis hard to roll over

FYI

Credit Cards, Debit Cards, and Money

Zero Reserve Ratios

CASE STUDY

Where is all the Currency

Bank Runs and the Money Supply

Consider the nature of money and its functionsin the economy

Learn about the Bank of Canada

Study how the banking system helps determine the supply of money

Examine the tools used by the Bank of Canadato alter the supply of money

barter

double coincidence of wants

money

wealth

The Functions of Money

medium of exchange

a unit of account

store of value

wealth

The Kinds of Money

intrinsic vlaue

gold standard

fiat

Money in the Canadian Economy

money stock

The Bank of Canada Act

Monetary Policy

monetary policy

The Simple Case of 100-Percent-Reserve Banking

100-percent-reserve banking

T-account

if banks hold all deposits in reserve, bank do notinfluence the supply of money

Money Creation with Fractional-Reserve Banking

reserve requirments

excess reserves

when banks hold only a fraction of deposits in reserve,banks create money

The Money Multiplier

the money multiplier is the reciprocal of the reserve ratio

thus, the higher the reserve ratio, the less of eachdeposit banks loan out, the smaller the moneymultiplier

The Bank of Canada's Tools of Monetary Control

Open-Market Operations

Changing Reserve Requirments

Changing the Overnight Rate

Problems in Controlling the Money Supply

The term money refers to asset that people regularly use buygoods and services

Money serves three functions

As a medium of exchange

it provides the item used to make transactions

As a unit of account

it provides the way in which prices and other economic values are recorded

As a storage value

it provides a way of transfering purchase power from the present to the future

Commodity money, such as gold, is money that has intrinsic value

it would be valued even if it were not used as money

Fiat money, such as paper dollars, is money without intrinsic value

it would be worthless if it were not used as money

In the Canadian economy, money takes the form of currencyand various types of bank deposits, such as chequeing accounts

The Bank of Canada, Canada's central bank, is responsiblefor controlling the supply of money in Canada. The governor andsenior debuty governor of the Bank of Canada are appointed for seven-year terms, adn the other directors are appointed for 3-yearterms.

all these appointments are made by the Canadian government, which owns the Bank of Canada

The Bank of Canada controls the supply of money primarilythrough changes in the overnight rate. Lowering the overnightrate increases the money supply, and raising the overnight ratereduces the money supply

The Bank of Canada also controls the money supply throughopen-market operations

The purchase of government bonds increases the money supply, andthe sale of sale of government bonds reduces the money supply.

When banks loan out some of their deposits, they increasethe quantity of money in the economy

Because of this role of banks in determining the moneysupply, the Bank of Canada's control of money supply is imperfect

Two Measures of the Money Stockfor the Canadian Economy - F 11.1

Quick Quiz

Question 1

List and describe the three fuctions of money.

Question 2

What is the difference between a central bank likethe Bank of Canada and a commercial bank like theBank of Montreal?

Question 3

Describe how banks create money.

If the Bank of Canada wanted to use all three of itspolicy tools to decrease the money supply, what wouldit do?

Questions for Review

Question 1

What distinguishes money from other assets in the economy?

Question 2

What is commodity money?

What is fiat money?

What kind do we use?

Question 3

What are demand deposits, and why should they theybe included in the stock of money?

Question 4

Who is responsible for setting monetary policy inCanada

Question 5

If the Bank of Canada wants to increase the money supply with open-marketoperations, what does it do?

Question 6

Why don't bank hold 100% reserves?

How is the amount of reserves banks hold related to theamount of money the banking system creates?

Question 7

What is the overnight rate?

What happens to the money supply when the Bankof Canada raises the overnight rate?

Question 8

What are reserve requirments?

What happens to the money supply when the Bank of Canadaraises the reserve requirments?

Question 9

What can't the Bank of Canada control the money supplyperfectly?