Ecn 204 Final Exam Notes

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Macro Final Exam
Chapter 10: The Money Systems
What assets are considered “Money”? What are the functions of money and the types of money? * W/o money, trade would require barter > Exchanging one good/service for another * unlikely occurrence that two people e/ have a good that other wants * 3 functions

* Medium of exchange: an item buyers give to sellers when they want to purchase g/s * Unit of account: the yardstick ppl use to post prices & record debts * Store of value: an item ppl can use to transfer purchasing power from the present to the future * 2 kinds

* Commodity money: commodity with intrinsic value, i.e. gold coins * Fiat money: money w/o intrinsic value, used as money b/c of gov’t decree, i.e. dollar bills * Money in Can’n economy

* Money supply (Money stock): the quantity of money available in the economy * Two assets should be considers:
* Currency: the paper bills & coins in the hands of the general public * Demand deposits: balances in bank accounts that despositors can access on demand by writing a cheque/using debit card * Money Supply = currency + deposits

What is the bank of Canada and its role? How do Banks create money? * Central Bank: an institution designed to regulate the money supply in the economy * Bank of Canada: the central bank of Canada

* Established in 1935, nationalized in 1938, owned by Can’n gov’t * Managed by board of directors appointed by minister of Finance, composed of: governor, the senior deputy governor (7 yr terms), 12 directors (3 yr terms) * Four primary functions:

* Issue currency, act as banker to commercial banks & Can’n gov’t, control money supply * Commercial Banks and Money Supply
* Although Bank of Canada alone is responsible for Canadian monetary policy, the central bank can control the supply of money only through its influence on the entire banking system * Commercial banks include credit unions, caisses populaires, and trust companies * Commercial banks can influence the quantity of demand deposits in economy and money supply * Reserves: cash that commercial banks hold

* Fractional banking system > Keeps fraction of deposits as reserves, rest is loaned * Banks may hold more than this minimum amt if they choose * The reserve ratio, R
* Fraction of deposits that banks hold as reserves
* Total reserves as % of total deposits
* Bank T-account
* T-account – simplified accounting statement that shows bank’s Assets & liabilities * Banks liabilities: deposits(what we put in the bank), Assets: Loans and reserves(What bank keeps) * R= Reserves/Deposits

* Banks & money supply
* $100 of currency is in circulation, determining impact on money supply: Calculate in 3 different cases * No banking system
* Public holds the $100 as currency; Money supply= $100 * 100% reserves banking system: banks hold 100% of deposits as reserves make no loans * MS = Currency (loans) + deposits = 0 +100 = 100 * Bank does not affect size of money supply

* Fractional reserve banking system
* R=10%: Reserves: 10, Loans: 90, Deposits: 100
* MS= $190
* When banks make loans > create money
* Borrower gets: 90 in currency(asset), 90 in new debt/loan (liability) * Money Multiplier: The amt of money the banking system generates with each dollar of reserves * Money multiplier = 1/R

* R =10, 1/R = 10, 100 x 10 = 1000
* The Bank of Canada’s tools of Monetary Control
* 1. Open-market operations
* When it buys gov’t bonds from/ sells to the public * Foreign exchange market operations: when it buy/sells foreign currencies * MS increase when bank of Canada buys foreign currency with Canadian Currency; and decrease when...
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