Textbook Notes (363,137)
Canada (158,217)
Economics (800)
ECON 1100 (224)
Chapter 9

Chapter 9

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University of Guelph
ECON 1100
Eveline Adomait

Chapter 9: Central Banking, Commercial Banking and Money Money: It’s Evolution, Uses, and Measurement - The use of money as a medium of exchange eliminates the need for barter - Money serves as a unit of account and a store value - The collapse of money supply would have recessionary consequences - The explosion of money supply would have inflationary consequences 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 to settle debt Fiat Money: an asset with no intrinsic value, such as paper currency, that is generally accepted as a means of payment for purchases and to settle debt Medium of Exchange: an asset used in purchasing goods/services Barter: the direct trade of goods/services for other goods/services Unit of Account: a basic measure of economic value Store of Value: an asset that serves as a means of holding wealth M1: sum of currency 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 a greater cost or inconvenience than currency or chequing accounts Commercial Banks and the Creation and Destruction of Money - Part of the money supply consists of deposits in private commercial banks and other financial intermediaries - The portion of deposits not held as reserves can be lent out by the banks to earn interest 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 of that particular bank by rushing to withdraw their deposits from the bank The Bank of Canada and its Three Major Responsibilities - Three major responsibilities 1. Issue bank notes 2. Stability of financial system 3. Monetary policy Currency: refers to bank notes and coins Seigniorage: refers to the profit gained from the issue of paper money or coin
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