Macro Chap 24

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Macro Chap 24
2014-10-28 13:12:10
macro test 24

Macro test 2 chap 24
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  1. Moeny
    token accepted as pmt
  2. Means of pmt
    method of settling a debt
  3. Medium of Exchange
    • object accepted in exchange for g/s
    • exchange = barter. Requires double coincidence of units
    • overcomes need of coincidence of wants
  4. Unit of Account
    Agreed measure fro stating prices of g/s
  5. Store of Value
    • can be held and exchanged later for g/s
    • not going to lose value over time
    • inflation is what decreases value of money
  6. Currency
    • notes and coins held by bus and individual
    • notes and coins inside bank don't count as currency b/c not held by individual or bus
  7. Deposits
    at fin institutions counted as money b/c owners can use them to make pmts
  8. Official Measure of Money
    • M1 - currency held by individuals and bus plus chequeable deposits. Doesn't include notes and coins held by banks
    • M2 - all of M1 plus all other deposits. Non chequeable and fixed term deposit
    • M1 is money. some of M2
  9. Deposits are money, cheques are not
    • instruction to transfer money
    • no extra made while cheque is in bank
  10. Credit cards are not money
    instant loan. I use card, card bills me.
  11. Depository Institution
    • private firm takes deposits and gives loans. 
    • lend high, borrow low
    • 3 types
    • chartered bank - private firm, larges institution, driven by bank act
    • Credit union and caisses populaire - receive deposits and make loan to customers. Credit association act 1992
    • Trust and mortgage loan - private. receive and make loans. Turst and loan co act 1992
  12. What depository Institutions do?
    • provide services which bring income from fees
    • most money made from lending money and buying securities
    • puts funds into 4 categories
    • Reserves - notes/coins in vault. Used to meet withdrawls
    • Liquid assets - gov t bills and commercial bills. First line of defense. Low interest rate, low risk
    • Securities - gov bonds (mortgage) can be converted but prices fluctuate Earn higher interest rate. Can't be converted until paid back
  13. Economic benefits provided by depository institutions
    • create liquidity - borrow short, lend long
    • poor risk - if loan not repaid, doesn't bank that much therefore everyone else's accts are ok
    • lower cost of borrowing - don't need to search for lenders
    • lower cost of monitoring borrowers - inst. can monitor at lower cost than households
  14. Central Bank
    • Public authority, supervises other banks and fin institutions. Controls amounts of cash
    • Special in 3 ways
    • 1. Banker to banks and gov - banks have restricted customers. Deposits are part of reserves
    • 2. Lender of Last Resort - ready to make loans when banking system can't
    • 3. Sale issuer of bank notes - only bank allowed to issue bank notes
  15. Bank of Canada Balance Sheet
    influences economy by changing interest rate. Changes amount of money in economy. Depends on A and L
  16. A on Bank of Canada Balance Sheet
    gov securities, loans to depository institutions
  17. L on Bank of Canada Balance Sheet
    bank of Canada notes (dollar bills) depository institutions deposits
  18. Monetary base
    bank of canada L plus coins issued by mint. Notes depository institutions deposits
  19. Open mkt operation
    • to change monetary base purchase/sale of gov securities from bank to open mkt 
    • can be purchase or sale
  20. Open Mkt Purchase
    • changes bank reserves. Bank of Canada buys securities from bank b/c banks don't sit on money. 
    • Bank will loan it out and LENDING CREATES MONEY
  21. Open Mkt Sales
    • Bank buys from bank of Canada. 
    • Bank has less cash to lend
  22. Creating Deposits by Making Loans
    • Credit card operates like a loan
    • when loans are made, money created b/c its a new deposits
  23. 3 factors limit qty of deposits banks can put out
    • 1. Monetary base - sum of notes, coins, and banks deposits at bank of canada. Limits total money b/c banks have desired reserves and so do households
    • 2. Desired reserves - what banks try to hold in vaults. Min qty.
    • 3. Desired currency holding - depends on how households want to spend and make pmts, currency or cards. Total money qty increases, planned holding increases.
  24. Desired Reserve Ratio
    ratio banks desire to hold
  25. Currency Drain Ratio
    • ratio of currency to deposits 
    • amount of new loan NOT deposited
  26. Money creation Process
    • begins w/ increase in monetary base (Bank of Can buys securities) bought w/ new reserves created
    • Excess reserves - banks actual reserves exceed desired
  27. Excess Reserves
    banks actual reserves are greater than desired
  28. Money Multiplier
    • ratio of change in qty of money to change in monetary base
    • lower banks desired reserve ratio, and lower currency draw, larger money multiplier
  29. Influences on Money Holding
    • Price Level
    • Nominal Interest Rate
    • Real GDP
    • Financial innovation
  30. Price Level (Influences on Money Holding)
    • qty money measured in dollars = nominal money
    • if price level up 10%, people hold 10% more money
    • Real money = nominal money divided by price level. Qty of money measured in terms of what it will buy
  31. Real Money
    • nominal money divided by price level. 
    • Qty of money measured in terms of what it will buy
  32. Nominal Interest Rate (Influences on Money Holding)
    • opp cost
    • higher cost of holding money, smaller real money demanded
    • nominal interest rate on other assets minus nominal interest rate on money = opp cost of holding money
  33. Real GDP (Influences on Money Holding)
    • qty of money households and firms hold depends on spending
    • if prices of goods stay the same and income increases, you will buy more goods
  34. Financial Innovation (Influences on Money Holding)
    • tech change influences qty money held
    • ex. atm, internet banking
  35. Demand for Money
    • relationship b/w qty real money demanded and nominal interest rate, everything else remaining the same
    • when interest rates up, opp cost of holding money rises, qty demanded decreases
  36. Shifts in Demand curve for money
    • change in real GDP
    • decrease, decreases demand for money SHIFT LEFT. This could be from fin innovation
    • increase, increases demand for money, SHIFT RIGHT
  37. Qty Theory of Money
    in long run, increase in qty of money brings equal percentage increase in price level
  38. Velocity of Circulation
    • average number of times a dollar used annually to by g/s that make up GDP
    • V=PY/M
    • p = price level
    • y = real GDP
    • m = qty of money
  39. Equation of Exchange
    • MV = PY
    • m = qty of money
    • v = velocity of circulation
    • p = price level
    • y= real gdp
    • also 

    money growth rate + rate velocity of change = inflation rate + real gdp growth rate