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Chapter 24

ECON 1010 CHapter 24 DEFINITIONS.docx

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ECON 1010
George Georgopoulos

DEFINITIONS  Money - Any commodity or token that is generally acceptable as means of payment  Means of payment - Method of settling a debt  Medium of exchange - An object that is generally accepted in exchange for goods and services  Barter - people would need to exchange goods and services directly in the absence of money  Unit of account - Is an agreed measure for stating the prices of goods and services  Store of value - Money can be held for a time and later exchanged for goods and services  Currency - Notes and coins held by individuals and businesses  Deposits - Are money, but cheques are not  Official measures of money - M1  Consists of currency held by individuals and businesses plus chequable deposits owned by individuals and businesses • All the items here are means of payment (they are money) - M2  Consists of M1 plus all other deposits- non-chequable deposits and fixed term deposits • Some savings deposits here are not means of payments (called liquid assets) o Liquidity  Property of being instantly convertible into a means of payment with little loss of value o Deposits  Are money, but cheques are not • Acheque is an instruction to a bank to transfer money o Credit cards  Are not money  Enables the holder to obtain a long, but it must be repaid with money  Depository institution - Afirm that takes deposits from households and firms and makes loans to other households and firms  Chartered bank - Aprivate firm, to receive deposits and make loans  Credit Unions - Acooperative organization that operates that receives deposits from and makes loans to is members  Caisse populaire - a similar type of institution (operates in Quebec)  Reserves - Notes and coins in its vault or its deposit at the Bank of Canada  Liquid assets - Canadian government Treasury bills and commercial bills  Securities - Longer-term Canadian government bonds and other bonds such as mortgage- backed securities  Loans - Commitments of fixed amounts of money for agreed-upon periods of time  Create liquidity - Taking deposits and standing ready to repay them on short notice  Pool risk - Along that may not be repaid off – a default  Central bank - Apublic authority that supervises other banks, financial institutions, financial markets and payments system, conducts monetary policy  Lend of last resort - It stands ready to make loans when the banking system as a whole is short of reserves  Bank of Canada’sAssets - Government securities - Loans to depository institutions  Bank of Canada’s Liabilities - Bank of Canada notes - Depository institution deposits  Monetary base - The sum of Bank of Canada notes, coins and depository institution deposits at the Bank of Canada  Open market operation - The purchase or sale of government securities by the Bank of Canada in the open market  Desired reserve ratio - Ratio of reserves to deposits that banks plan to hold - Exceeds the required reserve ratio by an amount that banks determine to be prudent  Currency drain - The leakage of bank reserves into currency  Currency drain ratio - Ratio of currency to deposits  Excess reserves - When a banks actual reserves exceed its desired reserves  Money multiplier - Ratio of the change in quantity of money to the change in monetary base  Price level - The average level of prices and value of money  Nominal money - Quantity of money measured in dollars - Proportional to price level, while other things remaining the same  Real Money - Equals to nominal money divided by the price level - The quantity of money measured in terms of what it will buy  Nominal interest rate - As opportunity cost of something increases, people try to find substitutes for it - Interest rate that you earn on currency and chequable deposits is zero  Real GDP - The quantity of money demanded in the economy as a whole depends on aggregate expenditure  Financial innovation - includes: Daily interest chequable deposits, Automatic transfers between chequable and saving deposits, Automatic teller machines, Credit cards and debit cards, Internet banking, Bill paying  Demand for money - Relationship between quantity of real money demanded and the nominal interest rate  Money market equilibrium - Occurs when quantity of money demanded equals the quantity of money supplied  Quantity theory of money - Proposition that in the long run, an increase in the quantity of money brings an equal percentage increase to price level  Velocity of circulation - Average number of times a dollar of money is used annually to buy the goods and services that make up GDP  Foreign currency - Money of other countries regardless of whether that money is in the form of notes, coins, or bank deposits  Forei
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