ECO100Y1 Lecture : Money & interest rates

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18 Apr 2011
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an asset that is sufficiently liquid to exchange for an immediate purchase: currency in circulation and deposits (demand) Functions of money: medium of exchange, store of value, unit of account. cur rency: legal tender (acceptable for payment of debt, fiat (trust) money inconvertible currency. deposits: bank liabilities sufficiently liquid for immediate use in purchase and sale. bank ing: business of borrowing money to lend money or to buy financial assets for a higher interest rate, f ractional reserve banking. occurs when bank deposits are a fraction of bank reserves: bank reserves: www. notesolution. com. Legal tender held by private banks (currency in vaults/ deposits at central bank) to pay out withdrawals. do not receive interest if they are currency in banks but may receive interest as bank deposits at central bank: reserve ratio. ratio of existing bank reserves to existing deposit liabilities. = actual reserves / deposits: required reserve ratio (rr)

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