Lecture 15 - ECO100

Lecture 15 - ECO100 - ECO 100Y ECO 100Y Introduction to...

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CO 100Y ECO 100Y troduction to Introduction to conomics Economics Lecture 15: he Banking S stem and The Banking System and e Supply of Money © Gustavo Indart Slide 1 the Supply of Money
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Two Views of Money ± Classical view: ¾ Changes in money supply lead to equal proportional changes in all prices herefore no change in relati e prices ¾ Therefore, no change in relative prices ¾ Money is neutral (i.e., doesn’t affect the level of real utput) output) ± Modern view: ¾ Money is neutral only in the long run ¾ Changes in money supply lead to increases in real utput in the short run © Gustavo Indart Slide 2 output in the short run
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Definition and Functions of Money ± Money is a medium of exchange ¾ A medium of exchange is anything that is acceptable exchange for goods and services in exchange for goods and services ± Functions of money: ¾ A medium of exchange ¾ A unit of account ¾ A standard of deferred payments ¾ A store of value © Gustavo Indart Slide 3
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ifferent Forms of Money Different Forms of Money ommodity money ± Commodity money ± Convertible paper money ± Fiat money ± Deposit money © Gustavo Indart Slide 4
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hree Measures of Money Three Measures of Money 1 ii l t i + d d d i t ± M1 – currency in circulation + demand deposits ± M2 – M1 + notice deposits ± M3 – M2 + fixed-term deposits © Gustavo Indart Slide 5
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efinitions Definitions ± Money supply: ¾ M = CU P + D ± Currency: ¾ CU = CU P + CU B ± Bank Reserves: ¾ RE = CU B + D CB © Gustavo Indart Slide 6
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ank of Canada Bank of Canada ± Canada’s central bank ± Controls and regulates financial institutions and kt markets esponsible for monetary policy ± Responsible for monetary policy ± Relatively independent from central government © Gustavo Indart Slide 7
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unctions of the Bank of Canada Functions of the Bank of Canada ± Banker to the commercial banks ± Lender of last resort to commercial banks ± Banker to the federal government ± Controller and regulator of the money supply ± Regulator and supporter of money markets © Gustavo Indart Slide 8
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Balance Sheet of the Bank of Canada ± Assets ¾ Loans to commercial banks ( L CB ) B d ( B ¾ Government Bonds ( GB ) ¾ Foreign-currency reserves ± Liabilities eposits of the commercial banks ( B ¾ Deposits of the commercial banks ( D CB ) ¾ Currency in circulation ( CU = CU P + CU B ) eposits of the Government of Canada ( © Gustavo Indart Slide 9 ¾ Deposits of the Government of Canada ( D G )
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inancial Intermediaries Financial Intermediaries hartered or commercial banks ± Chartered or commercial banks ± Trust and mortgage loan companies ± Local credit unions and caisses populaires © Gustavo Indart Slide 10
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