Chapter 10&11 econ midterm note

Chapter 10&11 econ midterm note - Chapter 10...

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Chapter 10 Functions of Money - Eliminate the need for a double coincidence of wants separate sellers from buyers - The value of goods and services are denominated in dollars and cents. - Allow us to hold part of our wealth in a convenient form. - Allow us to postpone purchases or otherwise plan transactions to suite ourselves. Commodity Money - would have value even if it were not used as money (e.g. cigarettes) Fiat Money - the government of the central bank regulate the fiat money system - However, the monetary system is really a social system - If we do not accept it, even government decree will not make it so. - (e.g. other country’s currency) The Directive A written order from the Minister of Finance to the Governor of the Bank of Canada, instructing him to change monetary policy. 1. NO directive has ever been issued. 2. A directive must be issued publicly Note: For this discussion, the Money Supply = Currency + Deposits. (This is a simplifying assumption.) Money multiplier = 1 / reserve ratio Ex.1 Assume R=10% Money= 1 / 0.1= 10 multiplier From our example: $100*10=1000 Ex.2 Assume R=20% Money = 1 / 0.2 = 5 multiplier $100*5=$500 Money held by the Bank of Canada is NOT included in the money supply. Foreign Exchange Market Operations and Sterilization If the Bank of Canada wants to sell foreign currency for any reason, but does not want the money supply to fall, it uses the Canadian currency obtained in the exchange to buy government bonds (open market operation). This process of offsetting a foreign exchange market operation with an open market operation is called sterilization .
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The influence of the financial sector - Financial institutions can influence the size of the money supply - Reserve ratio ® = - Money multiplier = - The money multiplier tells us how much “new money" can be created from a new deposit and a reserve ratio - In a fractional reserve banking system(R < 100%), financial institutions have the
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Chapter 10&amp;11 econ midterm note - Chapter 10...

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