ECON 102 - Chapter Review (Midterm 2).docx

ECON 102 - Chapter Review (Midterm 2).docx - Chapter 24 Two...

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Chapter 24 Two Measures of the Money Stock for The Canadian Economy o Money consists of coins, bank notes and chequable deposits o M1 = currency (bank notes and coins) outside the banks + demand deposits located in chartered banks Demand deposits – funds in accounts that can be removed without notice and usually pay little or no interest Ex. Current accounts, personal chequable accounts o M2 = M1 + personal savings deposits + term deposits and non- personal notice deposits located in chartered bank Saving Deposits – bank deposits that typically earn a rate of return and require a stipulated amount of notice to be withdrawn, though rarely enforced Notice Deposits – deposits which have a notice requirement in the contractual agreement with the client, although banks almost never enforce this clause Term Deposits – bank deposits paying a market rate of return which are deposited for a fixed term and thus have limited liquidity Chapter 24 RECAP
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Money o Description o 3 Functions – medium of exchange, unit of account, store of value o 2 Definitions – M1 and M2 The Banking System Depository Institutions (Financial Institutions) o 3 types of institutions – chartered banks, credit unions and caisses populaires trust and mortgage loan companies o 4 types of assets – reserves, liquid assets, securities, loans o 4 economic benefits of depository institutions create liquidity pool risk lower the cost of borrowing lower the cost of monitoring borrowers Banking Terms 1. M1, M2 2. Liquidity 3. Reserves 4. Monetary base 5. Open market operation 6. Desired reserves, desired reserve ratio 7. Desired currency holding 8. Currency drain, currency drain ratio 9. Excess reserves 10. Money multiplier Economic Benefits Provided by Depository Institutions (slide 20) o Create Liquidity 2
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Take deposits and are ready to repay them in the short- term Make loans which can be repaid over longer periods of time o Pool Risk depository institutions are in the lending business. An occasional default can be absorbed o Lower the cost of borrowing households and firms need not search for a source, or many sources, for loans o Lower the costs of monitoring borrowers Depository institutions can more easily monitor borrowers which allows institutions to make better decisions and reduce default risk Currency drain – an increase in currency held outside the banks o A currency drain decreases the amount of money that banks can create from a given increase in the monetary base because currency drains from their reserve and decrease the excess reserves available Currency drain ratio – currency/total deposits Reserves o Actual reserves – the notes and coins on hand and deposits at the Bank of Canada o Desired reserves – the number of reserves the bank plans to hold o Desired reserve ratio – desired reserves/total deposits o Required reserves – the minimum amount of reserves that banks must hold against deposits o
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