ECON 1BB3 Chapter Notes - Chapter 14: Cheque Guarantee Card, Debit Card, Mutual Fund

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viridianmarten541

26 Apr 2018

School

McMaster University

Department

Economics

Course

ECON 1BB3

Professor

Bridget O' Shaughnessy

For unlimited access to Textbook Notes, a Class+ subscription is required.

Chapter 13: Banking and Money Supply

Chequable Deposits: bank deposits that allow the account owner to write cheques to third

parties; ATM or debit cards can also access these deposits and transmit them electronically

Money Aggregates: measures of the economy the economy’s money supply

M+: narrow measure of money supply, consisting of currency and coins held by the nonbanking

public, traveller’s cheques and chequable deposits at chartered banks, TMLs and CUPCs

M1: currency held by nonbanking public, travellers cheques, and chequable deposits at chartered

banks

 Saving deposits & time deposits are not included, they serve as direct medias of exchange

→ Currency and checkable deposits are regarded as money bc each serve as a medium of

exchange, unit of account and a store value

Saving Deposits: deposits that earn interest w/ no specific maturity rate

Time deposits (Certificates of Deposit / CDs): deposits that earn a fixed interest rate if held for

a specific period. Can range from months to year.

M2: a money aggregate. Consists of currency (including coins) held by the non-banking public

and traveler’s cheques, personal and non-personal chequable + savings & personal time deposits

held at chartered banks.

M2+: money agg., consists of M2 + similar deposits at TMLS and CUCPs, life insurance

company individual annuities, personal deposits at govt.,-owned saving institutions & money

market mutual fund accounts

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Debit card: taps directly into the depositor’s bank account to fund purchases; cheque card

→ Credit cards do not eliminate your use of money, it delays it

→ C- banks serve as financiaredit cards provide a grace period between a purchased and

required payment

Banks are Financial Intermediaries

 Banks gather various amounts from savers and repackage these funds into the amounts

demanded by borrowers

 Banks reduce the transaction cost of channelling savings to creditworthy borrowers

Asymmetric info.: situation where one side of the market has more reliable info., than the other

 Borrowers have more reliable info about their own credit history and financial plans than

lenders do

 The economy is more efficient bs banks develop expertise in evaluating credit

worthiness, structuring loans, and enforcing loan contracts

→ Banks lend a tiny fraction of each saver’s deposit to each of its many borrowers, if one

borrower fails to repay a loan it hardly affects a large, diversified bank

Net worth (owner’s equity): assets - liabilities

Balance sheet: a financial system at a given point in time that shows assets on one side,

liabilities on the other. A = L + OE

Asset: anything of value that is owned

Liabilities: anything that is owed to others

→ Founders invest $500 000 in the bank in their application for the right to operate

→ exchanges the $ for shares of stock in the bank (OE)

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ECON 1BB3 Full Course Notes

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Document Summary

Chequable deposits: bank deposits that allow the account owner to write cheques to third parties; atm or debit cards can also access these deposits and transmit them electronically. Money aggregates: measures of the economy the economy"s money supply. M+: narrow measure of money supply, consisting of currency and coins held by the nonbanking public, traveller"s cheques and chequable deposits at chartered banks, tmls and cupcs. M1: currency held by nonbanking public, travellers cheques, and chequable deposits at chartered banks. Saving deposits & time deposits are not included, they serve as direct medias of exchange. Currency and checkable deposits are regarded as money bc each serve as a medium of exchange, unit of account and a store value. Saving deposits: deposits that earn interest w/ no specific maturity rate. Time deposits (certificates of deposit / cds): deposits that earn a fixed interest rate if held for a specific period.

Related Questions

raspberrychimpanzee722

1.Economists use the term money to refer to

A.all wealth.

B.all assets, including real assets and financial assets.

C.all financial assets, but not real assets.

D.those types of wealth that are regularly accepted by sellers in exchange for goods and services.

2.Which of the following is a function of money?

A.a unit of account

B.a store of value

C.medium of exchange

D.. All of the above are correct.

3.You pay for cheese and bread from the deli with currency. Which function of money does this best illustrate?

A.medium of exchange

B.unit of account

C.store of value

D.liquidity

4.Any item that people can use to transfer purchasing power from the present to the future is called

A.a medium of exchange.

B.a unit of account.

C.a store of value.

D.None of the above is correct.

5.Liquidity refers to

A.the ease with which an asset is converted to the medium of exchange.

B.the measurement of the intrinsic value of commodity money.

C.the measurement of the durability of a good.

D.how many time a dollar circulates in a given year.

6.Which list ranks assets from most to least liquid?

A.money, bonds, cars, houses

B.money, cars, houses, bonds

C.bonds, money, cars, houses

D.bonds, cars, money, houses

7.When we measure and record economic value, we use money as the

A.liquid asset.

B.medium of exchange.

C.unit of account.

D.store of value.

8.Commodity money is

A.backed by gold.

B.the principal type of money in use today.

C.money with intrinsic value.

D.receipts created in international trade that is used as a medium of exchange.

9.Fiat money

A.has no intrinsic value.

B.is backed by gold.

C.is a medium of exchange but not a unit of account.

D.is any close substitute for currency such as checkable deposits.

10.M1 includes

A.currency.

B.demand deposits.

C.traveler's checks.

D.All of the above are correct.

11.Which of the following items is included in M2?

A.credit cards

B.money market mutual funds

C.corporate bonds

D.large time deposits

12.Which of the following does the Federal Reserve not do?

A.conduct monetary policy

B.act as a lender of last resort

C.convert Federal Reserve Notes into gold

D.serve as a bank regulator

13.The Fed has the power to increase or decrease the number of dollars in the economy through the decisions of

A.the Board of Governors.

B.the FOMC.

C.the regional Federal Reserve Bank presidents.

D. the U.S. Treasury.

14.When conducting an open-market sale, the Fed

A.buys government bonds, and in so doing increases the money supply.

B.buys government bonds, and in so doing decreases the money supply.

C.sells government bonds, and in so doing increases the money supply.

D.sells government bonds, and in so doing decreases the money supply.

15.An open-market purchase

A.increases the number of dollars and the number of bonds in the hands of the public.

B.increases the number of dollars in the hands of the public and decreases the number of bonds in the hands of the public.

C.decreases the number of dollars and the number of bonds in the hands of the public.

D.decreases the number of dollars in the hands of the public and increases the number of bonds in the hands of the public.

16. If a bank has a reserve ratio of 8 per cent, then

A.government regulation requires the bank to use at least 8 per cent of its deposits to make loans.

B.the bank's ratio of loans to deposits is 8 per cent.

C.the bank keeps 8 per cent of its deposits as reserves and loans out the rest.

D.the bank keeps 8 per cent of its assets as reserves and loans out the rest.

17.If a bank uses $100 of excess reserves to make a new loan when the reserve ratio is 20 per cent, this action by itself initially makes the money supply

A.and wealth increase by $100.

B.and wealth decreased by $100.

C.increase by $100 while wealth does not change.

D.decrease by $100 while wealth decreases by $100.

18.The money multiplier equals

A.1/R, where R represents the number of reserves in the economy.

B.1/R, where R represents the reserve ratio for all banks in the economy.

C.1/(1+R), where R represents the number of reserves in the economy.

D.1/(1+R), where R represents the reserve ratio for all banks in the economy.

19.If the reserve ratio is 10 per cent, the money multiplier is

A.100.

B.10.

C.9/10.

D.1/10.

20.As the reserve ratio increases, the money multiplier

A.increases.

B.does not change.

C.decreases.

D.could do any of the above.

21.If the reserve ratio is 5 per cent, then $1,000 of additional reserves can create up to

A.$200 of new money.

B.$2,000 of new money.

C.$20,000 of new money.

D.None of the above is correct.

22.When the Fed makes open-market purchases, bank

A.withdrawals and lending increase.

B.withdrawals increase and lending decreases.

C.deposits and lending increase.

D.deposits increase and lending decreases.

23.The discount rate is the interest rate that

A.banks charge one another for loans.

B.banks charge the Fed for loans.

C.the Fed charges banks for loans.

D.the Fed charges Congress for loans.

24.If the discount rate is lowered, banks borrow

A.less from the Fed so reserves increase.

B.less from the Fed so reserves decrease.

C.more from the Fed so reserves increase.

D.more from the Fed so reserves decrease.

25.The Fed can increase the money supply by conducting open-market

A.sales or by raising the discount rate.

B.sales or by lowering the discount rate.

C.purchases or by raising the discount rate.

D.purchases or by lowering the discount rate.

26.The Fed can directly protect a bank during a bank run by

A.increasing reserve requirements.

B.selling government bonds to the bank.

C.lending reserves to the bank.

D.doing any of the above.

27.The federal funds rate is the interest rate

A.the Federal Reserves charges for loans it makes to the federal government.

B.the Federal Reserve charges banks for short-term loans.

C.banks charge each other for short-term loans of reserves.

D.on newly issued one-year Treasury bonds.

28.If the federal funds rate were below the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by

A.buying bonds. This buying would increase the money supply.

B.buying bonds. This buying would reduce the money supply.

C.selling bonds. This selling would increase the money supply.

D.selling bonds. This selling would reduce the money supply.

coffeecockroach306

1. The market in which loans are bought and sold is called the:

		loan market.
		money market.
		secondary loan market.
		primary loan market.

2. Which of the following is omitted in a barter transaction?

		trade
		medium of exchange
		store of value
		money

3. If Bill performs plumbing upgrades for Alice in exchange for her incorporating his business, then their _________________________ will be satisfied.

		balance of trade
		double coincidence of wants
		convenience of exchange
		division of labour

4. If loans become far less available, then sectors of the economy that ______________ like business investment, home construction, and car manufacturing can be dealt a crushing blow.

		depend on borrowed money
		typically generate extraordinary gains
		make loans to financial capital markets
		failed to diversify risk

5. Stealth bank has deposits of $600 million. It holds reserves of $30 million and government bonds worth $80 million. If the bank sells its loans at the market value of $400 million, what will its total assets equal?

		$110 million
		$710 million
		$480 million
		$510 million

6. Lance paid $175,000 for his house in 2003 and sold it for $325,000 in 2006. What function did the house serve during the time Lance owned it?

		medium of exchange
		unit of account
		store of value
		unit of exchange

7.Which of the following terms is considered to be a narrow definition of the money supply that includes, among other things, currency?

		savings
		money
		M2
		M1

8. Which of the following institutions determines the quantity of money in the economy as its most important task?

		U.S. Department of the Treasury
		Federal Open Market Committee
		Central Bank
		Federal Reserve Board of Governors

9. How are the specific interest rates for the lending and borrowing markets determined?

		U.S. Treasury Department Board policy
		by the forces of supply and demand
		through open market operations
		by altering the discount rate

10.When the central bank lowers the reserve requirement on deposits:

		the money supply increases and interest rates decrease.
		the money supply and interest rates decrease.
		the money supply and interest rates increase.
		the money supply decreases and interest rates increase.

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ECON 1BB3 Chapter Notes - Chapter 14: Cheque Guarantee Card, Debit Card, Mutual Fund

ECON 1BB3 Full Course Notes

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