Chapter 14: Money, Banking and the Central Banking System

Money

an asset that can be easily used to purchase goods and services

Currency in circulation

cash held by the public

Chequable bank deposits

bank accounts on which people can write cheques

money supply

total value of financial assets in the economy that are considered money

money must function as

a medium of exchange, a store of value, a unit of account

monetary aggregate

an overall measure of the money supply

M1+ and M2

two measures of the money supply

M1+

includes only the most liquid forms of money

M2

includes near-moneys: financial assets that can’t be directly used as a medium of exchange; can be readily converted into cash or chequable bank deposits

what percent of M1+ is currency in circulation?

around 8 percent

what makes up most of M1+ and M2

bank deposits

banks are financial intermediaries that use _

liquid assets to finance illiquid investments of borrowers

bank reserves

currency that banks hold in their vaults plus their deposits at the bank of Canada

T-account

tool for analyzing a business’s financial position by showing the business’s assets and liabilities

reserve ratio

fraction of bank deposits that a bank holds as reserves ($100,000/$1,000,000 = 10%)

bank run

phenomenon in which many of the bank’s depositors try to withdraw their funds because they fear a bank failure

demand deposits

considered most liquid

what banks do

financial intermediaries that use liquid assets (bank deposits) to finance the illiquid investments of borrowers

3 main features of bank regulation

deposit insurance, capital requirements, reserve requirements

deposit insurance

every bank in Canada is a member of the Canadian Deposit Insurance Corporation

capital requirements

requirements that the owners of banks hold substantially more assets than the value of bank deposits

monetary base

sum of the currency in circulation and bank reserves

money multiplier

ratio of the money supply to the monetary base

Bank of Canada acts as a …

banker for commercial banks, banker for federal government, issues currency, conducts monetary policy

four tools of the BOC

reserve requirements, bank rate, open-market operations, government deposit switching

overnight funds market

allows banks to borrow reserves from each other

overnight rate

interest rate in the market; strongly influenced by BOC

treasury bills, t-bills

short-term government bonds

In an open-market operation

Bank of Canada buys or sells Treasury bills

formula for money multiplier

total money createed = 1/reserve ratio x initial deposit

reserve ratio formula

reserves/deposits