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Flashcards by Esther-M.B, updated more than 1 year ago
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Created by Esther-M.B
almost 9 years ago
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| Question | Answer |
| What are the 3 functions of $? | -Medium of Exchange -Unit of account -Store of Value |
| What are the 2 kinds of money that can exist in an economy? | -Commodity $: A Commodity with intrinsic value -Fiat $: Money without intrinsic value. Used as $ cause of a government decree |
| What is the $ Stock? | The amount of $ circulating in an economy |
| What elements are included in the money stock? | -Currency: Liquid that you carry on you -Demand Deposit: $ You keep at the ban in checking account |
| What does the BIG 5 refer to? | the 5 main Canadian commercial banks -BMO -CIBC -TD -Scotia Bank -Royal Bank |
| What is the goal of the Central Bank? | Act in the nations interest |
| What are the 4 Jobs done by the Bank Of Canada? | - Control the money supply - Banker for commercial banks - Banker for Gov. - Issue Currency |
| How does the Bank of Canada influence the interest rate in an economy? | An increase in the money supply would bring more people to save and the interest rate would rise (Vice versa) |
| What are reserves, in a bank? | Deposits the bank has received, but hasn't loaned yet |
| In a fractional-reserve banking system, what are liabilities? | Amount of $ the bank has received but not loaned |
| In a fractional-reserve banking system, what are assets? | Amount of $ the bank has loaned and is nor receiving interest from |
| In a fractional-reserve banking system, what is the reserve ratio? | The fraction of $ the bank is obligated to keep in the bank as reserve |
| In a fractional-reserve banking system, what is the money multiplier? | The amount of $ the bank generates with every dollar of reserve |
| In a fractional-reserve banking system, how is the bank capital earned? | by issuing equity and debts |
| How does a bank generate profits? | -Makes loans -Holds reserve -Buys bonds -Buys stock |
| What is the money multiplier? | The amount of money the bank generates with each dollar of reserve |
| What occurs if a bank's assets fall below the amount of liabilities? | There is insolvent: The bank is unable to reimburse debt and deposits |
| What are capital requirements? | The minimal amount of capital mandatory in a bank, by law |
| What are the Bank of Canada's 2 monetary control tools | -Changing overnight rate -Doing open market operations |
| What is B.O.C's interest rate? | -Bank Rate: Interest % the B.o.C charges on loans it makes to commercial banks -B.O.C charges I% on loans to the commercial banks -B.O.C pays (I%-0.5%) if Comm. Bank has + checking balance |
| What is the overnight rate? | I% on short term loans between commercial banks |
| How does the Overnight% contribute to control the $ supply? | -If ON% increases, so will the bank %. - Increase in the bank % discourages banks from borrowing at the B.O.C -So comm. banks don't increase their reserves (thus $ supply) |
| What 3 open market operations contribute to the control of the $ supply | -Quantitative easing -Foreign exchange market operations -Changes in reserve regulations |
| Define Quantitative easing: | Purchase or sale of Gov bonds with long term maturities Goal: Control of $ Supply by B.O.C |
| Define Foreign exchange market operations: | Purchase or sale of foreign currency by B.O.C Goal: Control of $ Supply by B.O.C |
| How does a change in reserve requirement affect the $ supply? | -Increase reserves: reduce number of loans Decrease reserve: make more loans |
| What are the two problems that the B.O.C while trying to control the $ supply? | - Can't control household deposits -Can't control the amount of $ comm. banks lend |
| What is the relation between price level and monetary value? | -Increase P.L = decrease M.V -Decrease P.L= Increase M.N |
| What factors affect the demand of $ in an economy? | -Liquidity preference -Price Levels |
| Quantity Theory is: | Amount of $ in an economy determines price level. Growth rate of the amount of $ in an economy determines the inflation % |
| What is the immediate effect of money injection? | An excess of money supply |
| How does the money supply find an equilibrium after a monetary injection? | -People will increase their purchases &/or deposits in savings accounts - *Qty. of G&S produced wont change*- -The demand for more G&S will grow -Price levels will rise -The demand for $ will increase again -Equilibrium |
| How doe the classical dichotomy suggest the variables should be separated in an economy? | -Nominal -Real |
| What does the monetary neutrality theory propose? | That [in the long run] the real variables won't be affected by changes in the money supply |
| What does the velocity of money refer to? | The number of times a s dollar changes hands in a year |
| How do you explain the inflation rate using the velocity theory? | -Cause V is stable, when B.O.C changes M, P&Y proportionally change -Monetary neutrality: Y is a real variable so it won't be affected by change in M -So if M increases, P increases as well =Inflation |
| What is an Inflation tax? | The revenue that the Gov. raises by creating $ |
| What is one way the Gov. can put an end to inflation? | By implanting fiscal reforms (ex: cut his spending) |
| What does the Fisher effect state? | Nominal Interest Rate moves 1:1 with the Inflation Rate RI%=NI%-Infl.% |
| What are the 3 costs of inflation? | -(false) Fall in purchasing power** -Shoeleather costs: resources wasted when inflation has people keeping $ @ the bank -Menu costs: Costs of changing the prices |
| Law makers often omit inflation. What types of income are affected by this? | -Capital gain: Income taxes overlook inflation correction on income from item resale -Interest income: after tax RI% is much lower than it would have been if Infl%=0 |
| Interest must be paid on a loan. How does hyperinflation affect The Borrower? | It's easier for him to reimburse seeing as hyperinflation has increased his real wage |
| Interest must be paid on a loan. How does deflation affect The Borrower? | It's harder for him to reimburse seeing as deflation has decreased his real wage |
| What two markets can be found in an open economy? | -World Product market (for G&S) -World Financial Market (for Capital Assets) |
| Net Export determine it's what about a country in an open economy? | Weather it is a seller or a buyer |
| Which 6 factors influence the trade balance? | -Tastes of the consumers -Prices of G&S -Exchange rates -Consumer's incomes -Costs of transportation of the G&S -Gov. policies r/a international trade |
| Which 4 variables influence the Net Capital Outflow? | -RI% on domestic assets -RI% on foreign assets -Perceived risk r/a holding assets abroad -Gov. Policies |
| In an open economy, what constitutes a country's national savings? | Domestic Investments + Net Capital Outflow |
| Which international transaction depends on the Nominal Exchange rate? | Currency exchange |
| What is the difference between the appreciation and the depreciation of a currency? | -Appreciation: Currency who's value on the market has increased. Less of it is required to purchase another currency -Depreciation: Currency that has lost value on the market. It takes more of it to purchase another country's currency |
| Define real exchange rate | The rate at which a person can trade the G&S of a country for the G&S of another country |
| What is the purchasing-power parity? | A theory wherein one unit of a currency should be able to buy the same amount of a G&S here and abroad -According to this theory: NX% between two countries should reflect their different price levels |
| What is the law of one price? | Idea that states that a good should sell at the same price in all locations |
| If the law of one price is not applied, what is at risk of happening? | There will be more arbitrage |
| Define arbitrage: | The action whereby a person (or firm) buys a good in one location at a certain price but sells it in another location at a higher price to increase it's profits |
| What are the limitations of the PPP? | -Not all goods are perfect substitutes -Many G&S aren't easily traded |
| Define small open economy with perfect capital mobility: | a SOEWPCO identifies countries who's actions on international markets will only have a negligible impact on prices and who has full access to the world finacial market |
| What is the interest rate parity, and how does it differ from the purchase price parity? | The I%P is a theory that the RI% on comparable assets should sell at the rate in all countries with open economies with perfect capital mobility |
| What are the two limitations of interest rate parity? | - The risk that a country will default (even if interest is already quite high -Financial assets in different cities aren't the same (the don't necessarily have the same values) |
| A macroeconomic theory of a small open economy takes three things as given. What are they? | -GDP -Price Level -Real Interest Rate |
| What is the goal of a macroeconomic model of a small open economy? | Highlight the forces that determine an economy's trade balance and Exchange rate |
| Which elements are taken into account on the international market for loanable funds? | -Savings -Investments -Net capital outflow |
| Which elements are taken into account on the international market for currency exchange? | -People who want to trade domestic currency for foreign currency -Exchange rate |
| In a small open economy, how are national savings computed? | S= I + NCO |
| True of false: the quantity of loanable funds supplied by savings and the quantity demanded for invested must for the market to move forward? | False. If there is surplus, it will be used to pay the NCO If there are shortfalls, they will be met by foreigners' savings of domestic currency |
| What id the driving force of the market for foreign currency exchange? | The people's desire t purchase foreign goods and services but get paid in their own currency? |
| Define the Real Exchange Rate? | The price one must pay to purchase foreign currency. It balances the supply and demand in the market of foreign currency exchange |
| How does appreciation differ fro appreciation? | Appreciation is when the value of the domestic currency increase, compared to the one of foreign currencies. Depreciation is when the value of the domestic currency decreases, compared to the one of foreign currencies. |
| Which element links the market for foreign currency exchange and the market for loanable funds? | The Net Capital Outflow |
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