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Chapter 9

Chapter 9 Central Banking, Commercial Banking and Money

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ECON 1100
Eveline Adomait

Chapter 9: Central Banking, Commercial Banking and Money Thursday, February 21, 2012:04 PM 9.1 Money: Its Evolution, Uses and Measurement Definitions Money- any asset that can 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- an asset with no intrinsic value, such as a means of payment for purchases and to settle debts Barter- the direct trade of goods or services for other goods or services 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 Principles of Money 1) Medium of Exchange- an asset used in purchasing goods and services 2) Unit of Account- a basic measure of economic value 3) Store of Value- an asset that serves as a means of holding wealth 9.2 Commercial Banks and the Creation and Destruction of Money Definitions 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 or rumors of impending bankruptcy of multiple banks Bank Run- occurs when the depositors of a particular bank respond to news or rumors of impending bankruptcy or that particular bank by rushing to withdraw their deposits from the bank 9.3 The Bank of Canada and its Three Major Responsibilities Definitions Currency- consists of bank notes and coins Seigniorage- refers to the profit gained from the issue of paper money or coins Deposit Insurance- is provided to financia
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