Study Guides (400,000)
CA (160,000)
Ryerson (10,000)
ECN (400)
ECN 204 (100)

ECN 204 Study Guide - Final Guide: Credit Union, Mortgage Loan, Aggregate Demand

Course Code
ECN 204
Eric Kam
Study Guide

This preview shows pages 1-3. to view the full 31 pages of the document.
ECN 204 Final Review
Chap 24: Money, The Price Level, and Inflation
What is money?
Money is any commodity or token that is generally acceptable as a means of payment
A means of payment is a method of settling a debt.
Money has three other functions:
o Medium of exchange
o Unit of account
o Store of value
Medium of exchange is an object that is generally accepted in exchange for goods and services
Barter: in the absence of money, people would need to exchange goods and services directly. Requires
a double coincidence of wants, so its costly
Unit of account: an agreed measure for stating the prices of goods and services.
Store of value: money can be held for a time and later exchanged for goods and services
Money in Canada consists of
1. Currency
2. Deposits at banks and other depository institutions
Currency is the notes and coins held by individuals and businesses.
Official Measures of Money
The two main official measures of money in Canada are M1 and M2.
M1 consists of currency held by individuals and businesses plus chequable deposits owned by
individuals and businesses.
M2 osists of M plus all othe deposits─o-chequable deposits and fixed term deposits
Are M1 and M2 Really Money?
M1=money (all items in M1 are means of payment)
Some savings deposits in M2 are not means of payment, they are liquid assets
Liquidity is the property of being instantly convertible into a means of payment with little loss of value
Cheques are not money; they are instruction to a bank to transfer money
Credit cards are not money, a credit card enables the holder to obtain a loan, but it must be repaid
with money
Depository Institutions
depository institution: a firm that takes deposits from households and firms and makes loans to other
households and firms.
Types of Depository Institutions: Deposits at thee istitutios ake up the atio’s oe. The ae:
o Chartered banks: is a private firm private firm, chartered under the Bank Act of 1991 to receive
deposits and make loans.
o Credit unions and caisses populaires: A credit union is a cooperative organization that operates
under the Cooperative Credit Association Act of 1991 and that receives deposits from and
makes loans to its members. A caisse populaire is a similar type of institution that operates in
o Trust and mortgage loan companies
What do Depository Institutions do?
The goal of any bank is to maximize the wealth of its owners.
To achieve this objective, the interest rate at which it lends exceeds the interest rate it pays on
But the banks must balance profit and prudence:
find more resources at
find more resources at

Only pages 1-3 are available for preview. Some parts have been intentionally blurred.

ECN 204 Final Review
o Loans generate profit.
o Depositors must be able to obtain their funds when they want them
A hateed ak puts the depositos’ fuds ito fou tpes of assets:
o Reservesnotes and coins in its vault or its deposit at the Bank of Canada
o Liquid assetsCanadian government Treasury bills and commercial bills
o Securitieslongerterm Canadian government bonds and other bonds such as mortgage-
backed securities
o Loanscommitments of fixed amounts of money for agreed-upon periods of time
Depository institutions provide four benefits:
1. Create liquidity
2. Pool risk
3. Lower the cost of borrowing
4. Lower the cost of monitoring borrowers
The Bank of Canada
The Bank of Canada is the central bank of Canada.
A central bank is the puli authoit that egulates a atio’s deposito istitutios ad otol the
quantity of money.
The Bank of Canada is:
o Banker to the banks and government: The Bank of Canada accepts deposits from depository
institutions that make up the payments system and the government of Canada
o Lender of last resort: it stands ready to make loans when the banking system as a whole is short
of reserves. Banks lend and borrow reserves from other banks in the overnight loans market
o Sole issuer of bank notes: the only bank that is permitted to issue bank notes. The Bank of
Canada has a monopoly on this activity.
Bak of Caada’s assets=government securities (largest and most important asset) and last resort loans
to banks
Bak of Caada’s liabilities= notes and deposits of banks and the government
Monetary Base
Monetary base is the su of Bak of Caada otes outside the Bak of Caada, aks’ deposits at the
Bank of Canada, and coins held by households, firms, and banks.
To change the monetary base, the Bank of Canada conducts an open market operation, which is the
purchase or sale of government of Canada securities by the Bank of Canada in the open market.
Bank of Caada’s assets=source of monetary base
Bank of Caada’s liabilities=use of monetary base
The Bank of Canada’s Poli Tools
To achieve its objectives, the Fed uses three main policy tools:
o Open market operations
o Bank rate
Open Market Operations
Open market operation is the purchase or sale of government securities by the Bank of Canada from
or to a chartered bank or the public
When the Bank of Canada buys securities, it pays for them with newly created reserves held by the
When the Bank of Canada sells securities, they are paid for with reserves held by banks
“o ope aket opeatios ifluee aks’ esees
Open Market Purchase increases bank reserves
find more resources at
find more resources at

Only pages 1-3 are available for preview. Some parts have been intentionally blurred.

ECN 204 Final Review
Open Market Sale decreases bank reserves
Bank Rate
The Bank of Canada makes short-term loans, typically one-day loans, to major depository institutions
when the banking system is short of reserves.
Bank rate: The interest rate on loans to major depository institutions
Bank rate acts as an anchor for other short-term interest rates and is closely related to the Bak’s
target for the overnight loans rate.
How Banks Create Money
Banks create deposits when they make loans and the new deposits created are new money.
The quantity of deposits that banks can create is limited by three factors:
o The monetary base
o Desired reserves
o Desired currency holding
The Monetary Base
The su of Bak of Caada otes, ois, ad aks’ deposits at the Bak of Caada.
The size of the monetary base limits the total quantity of money that the banking system can create
1. Banks have desired reserves
2. Households and firms have desired currency holdings
And both these desired holdings of monetary base depend on the quantity of money.
Desired Reserves
A ak’s actual reserves consists of notes and coins in its vault and its deposit at the Bank of Canada.
The desired reserve ratio is the atio of the ak’s esees to total deposits that a ak plans to hold.
The desired reserve ratio exceeds the required reserve ratio by the amount that the bank determines
to be prudent for its daily business
Desired Currency of Holding
find more resources at
find more resources at
You're Reading a Preview

Unlock to view full version