L15 - ECO 100Y ECO 100Y ECO 100Y ECO 100Y Introduction to...

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Unformatted text preview: ECO 100Y ECO 100Y ECO 100Y ECO 100Y Introduction to Introduction to Introduction to Introduction to Economic Economic Economics Economics Lecture 15: Lecture 15: The Banking S stem and The Banking S stem and The Banking System and The Banking System and the Supply of Money the Supply of Money Gustavo Indart Slide 1 Two Views of Money Two Views of Money ! Classical view: " Changes in money supply lead to equal proportional changes in all prices " Therefore no change in relati e price " Therefore, no change in relative prices " Money is neutral (i.e., doesnt affect the level of real output) ! Modern view: " Money is neutral only in the long run " Changes in money supply lead to increases in real output in the short run Gustavo Indart Slide 2 output in the short run Definition and Functions of Definition and Functions of Money Money ! Money is a medium of exchange " A medium of exchange is anything that is acceptable in exchange for goods and services in exchange for goods and services ! Functions of money: " A medium of exchange " A unit of account " A standard of deferred payments " A store of value Gustavo Indart Slide 3 Different Forms of Money Different Forms of Money Different Forms of Money Different Forms of Money ! Commodity money ! Commodity money ! Convertible paper money ! Fiat money ! Deposit money Gustavo Indart Slide 4 Three Measures of Money Three Measures of Money Three Measures of Money Three Measures of Money M1 i i l ti + d d d it ! M1 currency in circulation + demand deposits ! M2 M1 + notice deposits ! M3 M2 + fixed-term deposits Gustavo Indart Slide 5 Definitions Definitions Definitions Definitions ! Money supply: " M = CU P + D C ! Currency: " CU = CU P + CU B ! Bank Reserves: " RE = CU B + D CB Gustavo Indart Slide 6 Bank of Canada Bank of Canada Bank of Canada Bank of Canada ! Canadas central bank ! Controls and regulates financial institutions and k t markets ! Responsible for monetary polic ! Responsible for monetary policy ! Relatively independent from central government Gustavo Indart Slide 7 Functions of the Bank of Canada Functions of the Bank of Canada Functions 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 government ! Controller and regulator of the money supply ! Regulator and supporter of money markets Gustavo Indart Slide 8 Balance Sheet of the Bank of Balance Sheet of the Bank of Canada Canada A ! Assets " Loans to commercial banks ( L CB ) " G B d GB " Government Bonds ( GB ) " Foreign-currency reserves ! Liabilities " Deposits of the commercial banks ( D CB ) " Deposits of the commercial banks ( D CB ) " Currency in circulation ( CU = CU P + CU B ) " Deposits of the Government of Canada ( D G ) Gustavo Indart Slide 9 " Deposits of the Government of Canada ( D G ) Financial Intermediaries Financial Intermediaries Financial Intermediaries Financial Intermediaries ! Chartered or commercial bank...
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L15 - ECO 100Y ECO 100Y ECO 100Y ECO 100Y Introduction to...

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