Chapter 10.docx

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26 Mar 2012
Chapter 10: The Monetary System
- Without money, trade would require barter, exchange of one g&s for another
- Transactions would require a double coincidence of wants the unlikely occurrence that two
people each have a good the other wants
- People would have to spend time searching for trade partners huge waste of resources
- Searching unnecessary with money
The 3 Functions of Money
Medium of exchange: item buyers give to sellers when the want to purchase g&s
Unit of account: the yardstick people use to post prices and record debts
Store of value: people can use to transfer purchasing power from the present to the future
Two kinds of Money
Commodity money: takes form of a commodity with intrinsic value (gold coins, cigarettes in POW
Fiat money: money without intrinsic value, used as money because of govt decree (Canadian dollar)
Money in the Canadian Economy
Money supply: quantity of money available in the economy
Assets part of money supply:
Currency: paper bills and coins in the hands of the public
Demand deposits: balances in bank accounts that depositors can access (cheques/debit)
The Bank of Canada
Central bank: institution designed to regulate the money supply in the economy, Bank of Canada
Four primary functions:
- Issue currency
- Act as banker to commercial banks
- Act as banker to Canadian government
- Control the money supply
Commercial Banks
- Central bank can control the supply of money only through its influence on the entire banking
- Commercial banks can influence the quantity of demand deposits in the economy and the
money supply
Fractional reserve banking system: bank keep a fraction of deposits as reserves and use the rest to make
The reserve ratio, R:
= fraction of deposits that banks hold as reserves
= total reserves as a percentage of total deposits
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