Final Exam Note

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22 Apr 2012

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Chapter 24
Money- commodity or token acceptable as means of payment
Barter- direct exchange goods, double coincidence of wants (costly)
Medium of Exchange- accepted in exchange for goods/services
Unit of Account- measure for stating the prices
Store of Value- money held later for exchange
Currency- bank notes, coins, deposits (cheques are only instructions to bank/credit cards are not money)
M1- currency outside bank + chequable deposits
M2- M1 + all other deposits
The Banking System
Depository Institution- takes deposits from households/firms and loans others
-Goal to max wealth, interest rate it lends exceeds interest rate it pays on deposits
-4 benefits: liquidity, pool risk, lower cost of borrowing, monitoring borrowers
Chartered Banks- private firm chartered under Bank Act of 1992 to receive deposits/make loans
Credit Unions- operates under Cooperative Credit Association Act, receives deposits/loans
Trust/Mortgage Loan Company- privately owned depository institution
Types of Assets (depositors funds)
1. Reserves- cash + deposits at Bank of Canada
2. Liquid assets- govn Treasury bills (chequing deposit)
3. Securities- long term govn bonds, mortgage-backed securities
4. Loans- fixed amount of money for agreed-upon periods of time
Bank of Canada- central bank of Canada regulates depository institutions, sole issuer of bank notes
Banker to Banks/Govn- accepts deposits from depository institutions make the payments system
Lender of Last Resort- makes loans when bank system as whole is short of reserves
Assets: government securities and loans to banks
Liabilities: bank notes and deposits of banks/government
Monetary Base- Bank of Canada notes/coins + depository institutions deposits at bank
Payments System- banks make payments to settle transactions by their customers
Large Value Transfer System (LVTS)- electronic payments system for chartered banks
Automated Clearing Settlements System (ACSS)- smaller payments than LVTS (debit card/ABM)
Banks create money- lends out excess reserves (reserves=notes/coins + deposits at B of C)
-deposits created by: monetary base, desired reserves, desired currency holding
Desired Reserves- ratio of reserves to deposits that banks want to hold
Excess reserves = actual reserves desired reserves
Currency Drain Ratio = currency ÷ deposits
Money Creation Process- (1)Banks have excess reserves (2)Banks lend excess reserves
(3)Money quantity increases (4)New money used to make payments (5)Some new money remains on deposit
(6)Some new money is current drain (7)Desired reserves increase (8)Excess reserves decrease
Money Multiplier = change in quantity of money ÷ change in monetary base (1+a)/(a+b)
Influences on Money Holding
Price Level- price increases quantity of nominal money (money measured in dollars) but doesn’t change quantity
of real money (nominal ÷ price)
Nominal Interest Rate- opportunity cost of holding wealth rather than interest-bearing asset
(nominal interest rises=decrease holding money)
Real GDP- increase real GDP = increases quantity of holding money
Demand for Money- QD of real money & interest rate (interest rate rises, QD real money decreases)
Money Market Equilibrium- quantity demand of money = Quantity Supply of money
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Chapter 26
Aggregate Supply- quantity of real GDP supplied & price level (labour can vary)
Long-Run Aggregate Supply (LAS)- quantity of real GDP supplied & price level when real GDP = potential GDP
-LAS vertical at potential GDP, shifts right when potential GDP increases = full employment
-price level rises & money wage rate change by same %, quantity of real GDP supplied remains at potential GDP
Short-Run Aggregate Supply (SAS)- quantity real GDP supplied & price when money wage rate, prices of other
resources, and potential GDP remain constant (SAS is upward slope)
-quantity of real GDP supplied increases if the price level rises
Aggregate Supply Changes- potential GDP increases, both LAS and SAS curves shift rightward
Potential GDP (1)full employment quantity of labour (2)quantity of capital changes (3)technology
Increase in potential GDP = LAS curve shifts right & SAS curve shifts along with LAS curve
Rise in money wage rate = shifts SAS curve left and not effect on LAS curve
Aggregate Demand- real GDP demanded (Y = C + I + G + X M)
Aggregate Demand Curve- quantity of real GDP demanded & price level
Changes in Aggregate Demand
Expectations- about future income, future inflation, future profits change AD
(expectations increase=AD increases)
Fiscal policy- decrease taxes, increases disposable income, govn expenditures/transfer payments=AD increases
(disposable income = aggregate income taxes + transfer payments)
Monetary policy- changes in interest rates decreases & quantity of money increases = AD increases
Short-Run Macro Equilibrium- real GDP demanded = real GDP (AD = SAS)
Long-Run Macro Equilibrium- real GDP = potential GDP (AD = SAS = LAS)
-Economic Growth: inflation AD shifts right faster than LAS shifts right
Business Cycle - AD & AS fluctuate, but money wage does not change to keep real GDP at potential GDP
- Business cycle series of different short-run macro equilibrium
-Below full-employment equilibrium: potential GDP exceeds real GDP (Recessionary Gap)
-Full-employment equilibrium: real GDP equals potential GDP
-Above full-employment equilibrium: real GDP exceeds potential GDP (Inflationary Gap)
Classical- macroeconomist believes economy self-regulating, always at full employment
Keynesian- macroeconomist believes economy would rarely operate at full employment, active help from
fiscal/monetary policy
Monetarist- low taxes, inappropriate monetary policy, money wage rate is sticky
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