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Chapter 16

EC223 Chapter Notes - Chapter 16: Open Market Operation, Landing Vehicle Tracked, Money Supply

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Angela Trimarchi

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EC223 Chapter 16 The Money Supply Process Week 9
Three Players in the Money Supply Process
1. The central bank the government agency that oversees the banking system and is responsible for
the conduct of monetary policy; in Canada, the Bank of Canada
2. Banks (depository institutions) the financial intermediaries that accept deposits from individuals and
institutions and make loans: chartered banks and near banks
3. Depositors individuals and institutions that hold deposits in banks
The Bank of Canada’s Balance Sheet
-Government securities
-Advances to banks
-Notes in circulation
-Often referred to as monetary liabilities of the Bank of Canada
-The sum of the Bank’s monetary liabilities (notes in circulation and reserves) and the Canadian Mint’s
monetary liabilities (coins in circulation) is called the monetary base
Notes in Circulation
-The amount of notes that is in the hands of the public and the depository institutions
-Coins issued by the Canadian Mint are not a liability of the Bank of Canada
-The coins and Bank of Canada notes that we use are collectively known as currency
-All banks that participate in the Large Value Transfer System (LVTS) have an account at the Bank of
Canada in which they hold deposits
-Reserves consist of settlement balanced at the Bank of Canada plus currency that is physically held by
-Reserves are assets for the banks but liabilities for the Bank of Canada because the banks can demand
payment on them at any time and the Bank of Canada is required to satisfy its obligation by paying Bank
of Canada notes
-Changes in the asset items lead to changes in reserves and consequently to changes in the money
-Because these assets earn interest while the liabilities do not, the Bank of Canada makes millions of
dollars every year its assets earn income and its liabilities cost little
Government Securities
-The Bank of Canada’s holdings of securities issued by the Canadian government
-Making advances (loans) to banks
-‘Borrowed reserves’
-Normal advances are fully collateralized and generally overnight in duration the interest rate charged
banks for these loans is called the bank rate
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