ECO 18 - 9 MAR - Lecture 18 ECO 100Y5Y 9 March 2009 A....

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Lecture 18 9 March 2009 ECO 100Y5Y A. Cohen 1 E C O N O M I C S PARKIN BADE Lecture 18 9 March 2009 E C O N O M I C S PARKIN BADE Chapter 25 Money, Banking, and Interest Rates What Is Money? Money is something acceptable as means of payment – method of settling a debt Money has three functions medium of exchange – accepted in exchange for goods and services unit of account – agreed measure for prices store of value – exchangeable at later date continued
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Lecture 18 9 March 2009 ECO 100Y5Y A. Cohen 2 Forms of money commodity money convertible paper money fiat money deposit money continued Official measures of money supply M1 — currency outside banks + demand deposits at banks M2+ — M1 + personal savings deposits + nonpersonal notice deposits + all deposits at other financial institutions Who creates money supply? Bank of Canada banks The Banking System Bank of Canada is Canada’s central bank – supervises financial institutions and markets, conducts monetary policy banker to other banks and government lender of last resort – makes loans to banking system when shortage of reserves sole issuer of bank notes Depository institutions – take deposits from households and firms and make loans
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Lecture 18 9 March 2009 ECO 100Y5Y A. Cohen 3 How Banks Create Money Banks create money (demand deposits) by lending out excess reserves desired reserve ratio ( b ) = desired reserves / total deposits excess reserves =
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ECO 18 - 9 MAR - Lecture 18 ECO 100Y5Y 9 March 2009 A....

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