Week 9 chapter notes

6 Pages
131 Views
Unlock Document

Department
Economics for Management Studies
Course
MGEA06H3
Professor
Iris Au
Semester
Winter

Description
Chapter 27 Money and Banking Notes 27.1 The Nature of Money What is Money? N medium of exchange anything that is generally accepted in return for goods and services sold N barter a system in which goods and services are traded directly for other goods and services N the double coincidence of wants is unnecessary when a medium of exchange is used The Origins of Money N Greshams law the theory that bad, or debased, money drives good, or undebased, money out of circulation N law predicts that when 2 types of money are used side by side, one with greater intrinsic value will be driven out of circulation N bank notes paper money issued by commercial banks N gold standard a currency standard whereby a countrys currency is convertible into gold at a fixed rate of exchange N fiat money paper money or coinage that is neither backed by nor convertible into anything else but is decreed by the government to be accepted as legal tender N legal tender anything that by law must be accepted for the purchase of goods and services or the repayment of a debt N if fiat money is generally acceptable, it is a medium of exchange; it its purchasing power remains stable, it is a satisfactory store of value; if both of these things are true, it serves as a satisfactory unit of account; today, almost all currency is fiat money Modern Money: Deposit Money N deposit money money held by the public in the form of deposits with commercial banks N bank deposits are money; today, just as in the past, banks create money by issuing more promises to pay (deposits) than they have cash reserves available to pay out 27.2 The Canadian Banking System N central bank a bank that acts as banker to the commercial banking system and often to the government as well; usually a government-owned institution that controls the banking system and is the sole money-issuing authority The Bank of Canada N the system of joint responsibility keeps the conduct of monetary policy free from day-to-day political influence while ensuring that the government retains ultimate responsibility for monetary policy N basic functions of the bankbanker to the commercial banks, banker to the federal government, regulator of the money supply, and regulator and supporter of financial markets Commercial Banks in Canada N commercial bank a privately owned, profit-seeking institution that provides a variety of financial services, such as accepting deposits from customers and making loans and other investments N clearing house an institution where interbank indebtedness, arising from the transfer of cheques between banks, is computed and offset and net amounts owing are calculated Reserves N the reserves needed to ensure that depositors can withdraw their deposits on demand will normally be quite small N bank run a situation in which many depositors rush to withdraw their money, probably leading to a banks financial collapse N fractional-reserve system a banking system in which commercial banks keep only a fraction of their deposits in cash or on deposit with the central bank N reserve ratio fraction of its deposits that commercial bank holds as reserves in form of cash or deposits with central bank N target reserve ratio the fraction of its deposits that a commercial bank wants to hold as reserves N excess reserves reserves held by a commercial bank in excess of its target reserves 27.3 Money Creation by the Banking System The Creation of Deposit Money N if v is target reserve ratio, new deposit to banking system will increase total amount of deposits by 1v times new deposit N with no cash drain from the banking system, a banking system with a target reserve ratio of v can change its deposits by 1v times any change in reserves Excess Reserves and Cash Drains N deposit creation does not happen automatically; it depends on the decisions of bankers; if banks do not choose to lend their excess reserves, there will not be an expansion of deposits N the larger is the cash drain from banking system, the smaller will be total expansion of deposits created by a change in reserves 27.4 The Money Supply N money supply the total quantity of money in an economy at a point in time; also called the supply of money Kinds of Deposits N term deposit an interest-earning bank deposit, subject to notice before withdrawal N the long-standing distinction between money and other highly liquid assets used to be that, narrowly defined, money as a medium of exchange that did not earn interest, whereas other liquid assets earned interest but were not media of exchange; today, this distinction has almost completely broken down Definitions of the Money Supply N M1 currency plus demand deposits www.notesolution.com
More Less

Related notes for MGEA06H3

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit