Macroeconmics - Chapter 11 - The Menotary System
TESTING
Questions for Review
Question 9
What can't the Bank of Canada control the money supplyperfectly?
Question 8
What happens to the money supply when the Bank of Canadaraises the reserve requirments?
What are reserve requirments?
Question 7
What happens to the money supply when the Bankof Canada raises the overnight rate?
What is the overnight rate?
Question 6
How is the amount of reserves banks hold related to theamount of money the banking system creates?
Why don't bank hold 100% reserves?
Question 5
If the Bank of Canada wants to increase the money supply with open-marketoperations, what does it do?
Question 4
Who is responsible for setting monetary policy inCanada
What are demand deposits, and why should they theybe included in the stock of money?
What kind do we use?
What is fiat money?
What is commodity money?
What distinguishes money from other assets in the economy?
Quick Quiz
Question 3
If the Bank of Canada wanted to use all three of itspolicy tools to decrease the money supply, what wouldit do?
Describe how banks create money.
Question 2
What is the difference between a central bank likethe Bank of Canada and a commercial bank like theBank of Montreal?
Question 1
List and describe the three fuctions of money.
MODELS
Two Measures of the Money Stockfor the Canadian Economy - F 11.1
SUMMARY
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
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 purchase of government bonds increases the money supply, andthe sale of sale of government bonds reduces the money supply.
The Bank of Canada also controls the money supply throughopen-market operations
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
In the Canadian economy, money takes the form of currencyand various types of bank deposits, such as chequeing accounts
Commodity money, such as gold, is money that has intrinsic value
Fiat money, such as paper dollars, is money without intrinsic value
it would be worthless if it were not used as money
it would be valued even if it were not used as money
Money serves three functions
As a storage value
it provides a way of transfering purchase power from the present to the future
As a unit of account
it provides the way in which prices and other economic values are recorded
As a medium of exchange
it provides the item used to make transactions
The term money refers to asset that people regularly use buygoods and services
COMMERCIAL BANK AND THE MONEY SUPPLY
Problems in Controlling the Money Supply
The Bank of Canada's Tools of Monetary Control
Changing the Overnight Rate
Changing Reserve Requirments
Open-Market Operations
The Money Multiplier
thus, the higher the reserve ratio, the less of eachdeposit banks loan out, the smaller the moneymultiplier
the money multiplier is the reciprocal of the reserve ratio
Money Creation with Fractional-Reserve Banking
when banks hold only a fraction of deposits in reserve,banks create money
excess reserves
The Simple Case of 100-Percent-Reserve Banking
if banks hold all deposits in reserve, bank do notinfluence the supply of money
T-account
100-percent-reserve banking
THE BANK OF CANADA
Monetary Policy
The Bank of Canada Act
THE MEANING OF MONEY
Money in the Canadian Economy
money stock
The Kinds of Money
fiat
gold standard
intrinsic vlaue
The Functions of Money
a unit of account
wealth
INTRODUCTION
double coincidence of wants
barter
LEARNING OBJECTIVES
Examine the tools used by the Bank of Canadato alter the supply of money
Study how the banking system helps determine the supply of money
Learn about the Bank of Canada
Consider the nature of money and its functionsin the economy
EXTRA READING
CASE STUDY
Bank Runs and the Money Supply
Where is all the Currency
FYI
Zero Reserve Ratios
Credit Cards, Debit Cards, and Money
IN THE NEWS
Money on the island of Yap
Fixed Assets, or Why a loan in Yapis hard to roll over
KEY TERMS
overnight rate
the interst rate on very short-term loansbetween commercial banks
bank rate
the interest rate change by the bank of Canada on loans tothe commercial banks
reserve requirments
regulations on the minimum amount of reservesthat banks must hold against deposits
sterlization
the process of offsetting foreign exchange marketoperations, so that the effect of the money supplyis cancelled out
foreign exchange market operations
the purchase or sale of foreign money by theBank of Canada
open-market operations
the purchase or sale of government bonds bythe Bank of Canada
money multiplier
the amount of money the banking system generateswith each dollar of reserves
reserve ratio
the fraction of deposits that banks hold asreserves
fractional-reserve banking
a banking system in which banks hold onlya fraction of the deposits as reserves
reserves
deposits that banks have recieved but not loanedout
monetary policy
the setting of the money supply by policymakers in the central bank
money supply
the quantity of money available in the economy
central bank
an institution designed to regulate the quantityof money in the economy
Bank of Canada
the central bank of Canada
demand deposits
balances in bank accounts that depositors canaccess on demand by writing a cheque or usinga debt card
currency
the paper bills and coings in the hands of thepublic
fiat money
money without intrinsic value that is usedas money because of government decree
commodity money
money that takes the from of a commoditywith intrinsic value
liquidity
the ease with which an asset can be converted into theeconomy's medium of exchange
store of value
an item that people can use to transfer purchasingpower from the present to the future
unit of account
the yardstick people use to post prices andrecord debts
medium of exchange
an item that buyers give to sellers whenthey want to purchase goods and services
money
the set of assets in an economy that peopleregularly use to buy goods and services fromother people
