Economics Unit 3
Money and Banking
Money : 
Functions of Money
Characteristics of Money
Definition of money
A measure of value
A store of value
A medium of exchange
Easily divided into units
Readily recognizable by shape + colour
Durable
Difficult to duplicate
portable and easy to use
MUST retain value over time
Anything to purchase goods + purchases
Oppose counterfeiting
Must be accepted in economy
Monetary Policy
Bank of Canada
Interest rates
price charged for borrowing money
Functions
Director of Monetary policy
Monetary Policy
Banker to the chartered bank
Chartered Bank
established by charter from government
Influencing money and credit
Banker to the federal government
Issuer of currency
Role of Interest rates
Monetary Policy at Work
Affects consumer to save/borrow money
Tools of Monetary Policy
Overnight Rate target
Bank's Balance Sheet
Different Types of Interest Rates
Prime Rate
Bank Rate
Inflation Premium
Nominal Interest rate
Real rate of interest
financial institution's lowest interest rate
Given to its best customers
Bank of Canada's interest rate
to chartered banks
Determines rate to customers
Allowance for inflation
built into all interest rates
Interest rate that includes:
allowance for risk
credit worthiness
inflation premium
Nominal interest rate minus
expected rate of inflation
Easy Money Policy
Tight Money Policy
Stage 1
The Bank shifts government deposits
To accounts of chartered banks
Stage 2
Stage 3
Stage 4
Stage 2
Stage 3
Stage 1
Stage 4
Lend more with increased reserves
lowering interest rates attracts potential borrowers
Lower interest rates encourage large purchases
Consumers borrow for houses, car, appliances
Businesses borrow more for stocks, plants
New borrowings increase money supply growth
From increased bank deposits and reserves
The economy purchases increased output
Increased consumer / business spending
Increases Aggregate Demand and GDP
Ends recession, leads to full employment
The Bank shifts government accounts back
From chartered banks to Bank of Canada
Decreased reserves = less money lend out
Raise interest rate with decreased supply
Higher interest rates discourage borrowing
Consumers borrow for large purchases
Businesses cut investment in stocks, plants
Less borrowing decreases money supply growth
Decreased reserves = Chartered banks can't lend
Contributes to fall in spending
Decreased consumer / business spending
Decreases aggregate demand and prices
Ends the period of high inflation
Affects business' decision to borrow/expand
Affects Demand for Canadian money
Value of the dollar
Supply+ Demand for Loanable Funds
Changes in Interest Rates
Interest Rate affects Supply and Demand
Demand
Supply
Consumers borrow money for large purchases
Businesses borrow , calculating rate of return
Rate of Return
Estimated extra revenue from investment
Government
Not affected by interest rate
Interest costs paid by taxpayers
Business , money in deposit accounts
Chartered Banks, by regulating money supply
Individuals, money in deposit accounts
Demand
Fund demand increases (curve shifts right
Increase rate during "good times"
Supply
Fund demand decreases (curve shifts left)
Decrease rate during "uncertain times"
During good times, people save more
Curve shifts right, decrease rate
During recession, people reduce savings
Curve shifts left, increase rate
shift deposits buy/sell bonds
The Bank's tool to control inflation rate
Bank pays 0.5% less than Bank rate
This 0.5% range is called operating band
Overnight rate target: operation band's midpoint
Banks trade with each other
At the overnight rate
increase / decrease chartered banks' interest rate
influence short-term interest rates
speed / slow down money supply growth
The Bank states overnight rate target
Assets
Foreign Exchange
Advances to the chartered banks
Government of Canada Bonds
Liabilities
Currency Outstanding
Deposits of the chartered banks
Deposits of the federal government
Government sells bonds to the Bank
Canadian government receives money from Bank
Government promises to pay back
stock of foreign currencies
defend Canadian dollar on international markets
The Bank lends money to chartered banks
Charges interest (the Bank rate)
all bank notes issued by Bank
Asset to people, liability to Bank
Balances held by chartered banks
to settle debts + act as reserves
central bank pays interest
"chequing account" of the federal government
government deposits revenues + pays expenses