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Lecture 36

Lecture 36-Money

3 Pages
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Department
Economics
Course Code
ECO102H1
Professor
Jack Carr

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Tuesday, March 9th, 2010.
Money
(Canada: Currency + Bank Deposit)
1. Purposes
I. Medium of Exchange
II. Store of Value
III. Unit of Account
2. Alternative to Money: Barter (very inefficient)
Banking System
1. Central Bank (Bank of Canada)
Uses control of money supply and interest rates to influence Aggregate Demand
2. Commercial Banks
Create money as by-product of profit-seeking activities
How do Banks Create Money?
Simplifying Assumptions
1. All banks have same desired/target reserve ration *
2. No cash drain (amount of cash held by public is fixed) *
3. Bank capital is zero (for numerical examples)
* Important assumptions
Desired Reserve Ratio of Bank
Simple Balance Sheet
Assets (A) Liabilities (L)
Reserves 40 Deposits 400
Loans 360
Reserves = Vault Cash + Deposits at Bank of Canada
Reserves earn low or zero interest
Loans earn market interest rate
Desired Reserve Ratio = Desired Reserves / Deposits
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Description
th Tuesday, March 9 , 2010. Money (Canada: Currency + Bank Deposit) 1. Purposes I. Medium of Exchange II. Store of Value III. Unit of Account 2. Alternative to Money: Barter (very inefficient) Banking System 1. Central Bank (Bank of Canada) Uses control of money supply and interest rates to influence Aggregate Demand 2. Commercial Banks Create money as by-product of profit-seeking activities How do Banks Create Money? Simplifying Assumptions 1. All banks have same desired
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