ECON203 - CH8 and CH9
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What is Money?
the medium of exchange used to make payments for goods and services. It also serves as a unit of account
What is Legal tender?
the money that must be accepted as a means of payment by law
What is Flat Money?
the money govt has declared as legal tender
What is Money Supply (M)? Formula?
this is the amount of currency in circulation (outside banks) plus bank deposits
MS = (1+cr)D
What are the ways to measure money supply? (3)
- M1: this is the total of cash in circulation plus all checking deposits in banks
- M2: is M1 plus savings deposits
- M2+: is M2 plus deposits at other financial institutes other than banks
What is a Monetary Base (H) ? Whats the formula?
All the currency (notes and coins) in circulation plus the cash reserves held by the banks. It is also known as high-powered money
= (rr + cr)D
What's the difference between Money supply (M) and Monetary Base (H)?
Money supply includes bank deposits, and instead H includes bank cash reserves. Deposits are always greater than cash reserves. MS > MH
What is Financial Intermediary (FI)?
a business that brings borrowers and lenders together (eg: bank)
Who are the bank of canada?
Canada's central bank. It does not act like a private bank. It has the responsibility to regulate the national money supply
What is liquidity?
How easily assets can be turned into cash
What is the net interest income?
the difference between loan interest earned and deposit interest paid.
How do banks create money?
they do it by only holding a portion of their deposits as cash (cr) and lending out the rest. the bank always earns higher interest on the loans it gives out than the interest it pays to its depositors. this is why the bank tries to give out as many loans as possible.
What is the currency ratio?
the ratio of cash to deposits held by the public (households). It is also knowsn as the Cash Drain Ratio
- - the banks hold the cash in the economy not held by the public
- - if the public holds all its money as cash, the banks cannot obtain the cash reserves they need to cover their deposit liabilities
What is reserve ratio rr?
the ratio of cash reserves to deposits is held by banks
- this lets us know what percentage of the money deposited into the bank is held by the bank as cash for clients to withdraw from their accounts at any given time.
What are Financial Panics?
People lose confidence in banks and rush to withdraw cash
What are commercial papers?
short term 30 day and 60 day notes used to pay the buyer s interest created by loans and accounts receivable
What is the money multiplier in ch9? le formula
the change in the money supply caused by a change in the monetary base
money multiplier = change in M/ change in H
The ____ the rr, the more loans banks can give out in comparison to its deposits and the ___ the money multiplier will be.
The ____ the cr, the less cash the public is holding and the greater the share of H held by the banks. This means the banks can create more deposites, so the ____, the _____ the multiplier
Lower, Lower, Higher
What's a financial Portfolio?
a collection of financial assets
what is a bond?
a financial contract that makes one or more fixed money payments at specific dates in the future.
eg:/ I will lend a company 1000$ and it promises to pay me $50 every year for 3 years and at the end of the 3 years it will give me back my $1000
What is an interest rate?
the market rate paid to lenders.
EG: in the example above, the interest payments are $50 and the interest rate is 50/1000 = 5%
What is the Price of the Bond?
The bonds current price. All you need to know is that as interest rates increase the price of bonds decrease. Bond prices and interest rates are negatively related.
What is Yield On A Bond?
The return on a bond. As interest rates increase, bond yields also increase. Yields and interest rates are positively related
What is Capital Gain or Loss?
The increase or decrease in the bond price (caused by changed in interest rates)
What do bond managers do when they see that bond prices offer yields higher than current market interest rates?
They will buy the bonds
More people buying bonds makes the price ____ and the yields will ___ until they reach current market interest rates.
If bond yields are ____ than the interest rate, people will sell their bonds, which _____ the price. This will lead to ___ yields until eventually it reaches the current interest rate again.
lower, sell, decreases, higher
What do Money Holdings mean?
they simply means how much money people like to hold as cash.
What are 3 main things that affect demand for money holdings?
- 1 - Interest rates
- 2 - Price Level
- 3 - Real Income
The opportunity cost of holding money is the interest income given up by not investing it in bonds. Then what is the benefit?
The transactions, precautionary and asset motive
What is the Transactions Motive for holding money?
it arises from the difference in the timing of when you receive money and when you have to make payments.
What is the Precautionary motive to hold money?
it arises from uncertainty about the timing of when you receive money and when you have to make payments.
What is the Asset motive for holding money?
It arises from the desire to reduce portfoilio risk.
people do not want to put all their money into stocks and bonds because they do not want all their money to be exposed to the risk.
What is the Real Money Supply? formula
its the nominal money supply (M) divided by the price level (P)
What is the foreign exchange rate?
the domestic currency price of a unit of foreign currency or amount of canadian dollars you would need to exchange for an american dollar.
What is the Transmission Mechanism?
links money, interest rates, and exchange rates through financial markets to output, employment and prices. the 3 main ways it does this is by looking at the effect that changes in interest rates have on:
- 1- Consumption expenditure
- 2 - investment expenditure
- 3 - foreign exchange rates and net exports
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