Money
Money
3-1
Money and the Price Level
1-2
Money Growth and Inflation
3-3
Meaning of Money Money - anything that is generally accepted in payment for
goods or services or in the repayment of debts; a stock concept
Wealth - the total collection of pieces of property that serve
to store value
Income - flow of earnings per unit of time
3-4
Barter The direct exchange of goods and services for other goods
and services. Disadvantages of Barter: Variable Value of Assets Time-consuming Negotiation of Price
Large number of transactions Double Coincidence of Wants
3-5
Money vs. Barter Money improves social welfare by Reducing transaction costs
Simplifying trades
Money is not necessarily just bills and coins
3-6
Island of Yap
3-7
Functions of Money Medium of Exchange - promotes economic efficiency by
minimizing the time spent in exchanging goods and services
Unit of Account - used to measure value in
the economy
Store of Value - used to save purchasing power; most liquid
of all assets but loses value during inflation
3-8
Evolution of the Payments System Commodity and Fiat Money Paper money and Legal tender
Acceptable as medium of exchange
Cheques Electronic Payment Internet payments Debit card Smart card (contains computer chip)
E-cash (e.g. PayPal)
3-9
Types of Banks and Deposits Current Accounts and Personal Chequable Accounts (Demand
deposits)
Funds in accounts that can be removed without notice and usually pay little or no
interest.
Savings Deposits Bank deposits that typically earn a rate of return and require a stipulated amount of notice to be withdrawn. Term Deposits Bank deposits paying a market rate of return which are deposited for a fixed term and thus have limited liquidity. Money Market Mutual Funds (MMMFs) Funds that issue shares to holders backed by high-quality short-term assets such as Treasury bills.
3 - 10
The Measurement of Money Considerations: chartered vs. other types of financial institutions
types of deposits and their evolution: the growth of electronic
transactions types of financial assets
3 - 11
Monetary Aggregates M1+ includes only currency and various deposit accounts on which
people can write cheques both at banks and at other depository institutions. M2 ++ includes everything that is in M1 plus assets that cannot be used directly as a means of payment and are more difficult to turn into currency quickly, like money market deposit accounts, Canada Savings Bonds and money market mutual fund shares. The word ‘gross’ after the name refers to the fact that the aggregates are not adjusted for the cheque float. Not adjusting for the float means that the funds represented by cheques in transit are doublecounted. Earlier aggregates were net of the float but today the float is so small that it is not worth correcting for. 3 - 12
Money as a Weighted Aggregate The Bank of Canada’s money supply measures are ‘simple-
sum’ indices, the index M = x1 + x2 + … + xn , Where xj is one of the n monetary components of the monetary aggregate M • Weighted monetary aggregates (Divisia Index) seem to predict inflation and the business cycle somewhat better than the conventional measures
3 - 13
Measuring Money
3 - 14
How Reliable are the Money Data? Revisions are issued because: Small depository institutions report infrequently Adjustments must be made for seasonal variation We probably should not pay much attention to short-run
movements in the money supply numbers but should be concerned only with longer-run movements.
3 - 15
3-1
Money and the Price Level
1-2
Money Growth and Inflation
3-3
Meaning of Money Money - anything that is generally accepted in payment for
goods or services or in the repayment of debts; a stock concept
Wealth - the total collection of pieces of property that serve
to store value
Income - flow of earnings per unit of time
3-4
Barter The direct exchange of goods and services for other goods
and services. Disadvantages of Barter: Variable Value of Assets Time-consuming Negotiation of Price
Large number of transactions Double Coincidence of Wants
3-5
Money vs. Barter Money improves social welfare by Reducing transaction costs
Simplifying trades
Money is not necessarily just bills and coins
3-6
Island of Yap
3-7
Functions of Money Medium of Exchange - promotes economic efficiency by
minimizing the time spent in exchanging goods and services
Unit of Account - used to measure value in
the economy
Store of Value - used to save purchasing power; most liquid
of all assets but loses value during inflation
3-8
Evolution of the Payments System Commodity and Fiat Money Paper money and Legal tender
Acceptable as medium of exchange
Cheques Electronic Payment Internet payments Debit card Smart card (contains computer chip)
E-cash (e.g. PayPal)
3-9
Types of Banks and Deposits Current Accounts and Personal Chequable Accounts (Demand
deposits)
Funds in accounts that can be removed without notice and usually pay little or no
interest.
Savings Deposits Bank deposits that typically earn a rate of return and require a stipulated amount of notice to be withdrawn. Term Deposits Bank deposits paying a market rate of return which are deposited for a fixed term and thus have limited liquidity. Money Market Mutual Funds (MMMFs) Funds that issue shares to holders backed by high-quality short-term assets such as Treasury bills.
3 - 10
The Measurement of Money Considerations: chartered vs. other types of financial institutions
types of deposits and their evolution: the growth of electronic
transactions types of financial assets
3 - 11
Monetary Aggregates M1+ includes only currency and various deposit accounts on which
people can write cheques both at banks and at other depository institutions. M2 ++ includes everything that is in M1 plus assets that cannot be used directly as a means of payment and are more difficult to turn into currency quickly, like money market deposit accounts, Canada Savings Bonds and money market mutual fund shares. The word ‘gross’ after the name refers to the fact that the aggregates are not adjusted for the cheque float. Not adjusting for the float means that the funds represented by cheques in transit are doublecounted. Earlier aggregates were net of the float but today the float is so small that it is not worth correcting for. 3 - 12
Money as a Weighted Aggregate The Bank of Canada’s money supply measures are ‘simple-
sum’ indices, the index M = x1 + x2 + … + xn , Where xj is one of the n monetary components of the monetary aggregate M • Weighted monetary aggregates (Divisia Index) seem to predict inflation and the business cycle somewhat better than the conventional measures
3 - 13
Measuring Money
3 - 14
How Reliable are the Money Data? Revisions are issued because: Small depository institutions report infrequently Adjustments must be made for seasonal variation We probably should not pay much attention to short-run
movements in the money supply numbers but should be concerned only with longer-run movements.
3 - 15
