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Lecture

Macroeconomics Chapter 9.docx

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Department
Economics
Course
ECON 1100
Professor
Eveline Adomait
Semester
Winter

Description
Chapter 9 Central Banking, Commercial Banking and Money 9.1 Evolution of Money Money- any asset that an be used as a means of payment for purchases and to settle debts Commodity money- an asset with intrinsic value, such as a gold or silver coin, that is generally accepted as a means of payment for purchases and to settle debts Fiat money- as asset with no intrinsic value, such as paper currency, that is generally accepted as a means of payment for purchases and to settle debts Three principal uses of money 1. medium of exchange 2. unit of account 3. store of value Medium of exchange- an asset used in purchasing goods and services Barter- the direct trade of goods and services Unit of account- a basic measure of economic value Store of value- an asset that serves as a means of holding wealth Two measuers of the money supply of considerable historic significance are a naarow measure M1 and the broader measure M2 M1- sum of currency outside banks and balances held in demand deposits M2- all the assets in M1 plus some additional assets that are usable in making payments but at greater cost or inconvenience than currency or chequing accounts 9.2 Commercial Banks and the Creation and Destruction of Money Bank reserves- cash or similar assets held by commercial banks for the purpose of meeting depositor withdrawals and payments 100 percent reserve banking- a situation in which banks’ reserves equal 100 percent of their deposits Reserve-deposit ratio- bank reserves divided by deposits Fractional-reserve banking system- a banking system in which bank reserves are less than deposits so that the reserve-deposit ratio is less than 100 percent Banking panic- occurs when there is a rush of withdrawals from the banking system made by depositors responding to news of rumors of impending bankruptcy of multiple banks Bank run- occurs when the depositors of a particular bank respond to news or rumours of impending bankruptcy of that particular bank by rushing to withdraw their deposits from the bank 9.3 The Bank of Canada and Its Three Major Responsibilitie
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