Transcript Document

Chapter 3
What Is Money?
Copyright  2011 Pearson Canada Inc.
3-1
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
Copyright  2011 Pearson Canada Inc.
3-2
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
Copyright  2011 Pearson Canada Inc.
3-3
Functions of Money I
• If money is not unique as a store of value, why
do people hold money?
– The answer is liquidity, the relative ease and speed
which an asset can be converted into a medium of
exchange.
Copyright  2011 Pearson Canada Inc.
3-4
Evolution of the Payments System
•
•
•
•
•
Commodity Money
Fiat Money
Cheques
Electronic Payment
E-Money
Copyright  2011 Pearson Canada Inc.
3-5
Measuring Money I
• Float – funds in transit between the time a
cheque is deposited and the time the
payment is settled.
• Measures of Money Supply:
– M2
– M3
– M2+
Copyright  2011 Pearson Canada Inc.
3-6
Measuring Money II
Copyright  2011 Pearson Canada Inc.
3-7
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 seem to
predict inflation and the business cycle
somewhat better than the conventional
measures
Copyright  2011 Pearson Canada Inc.
3-8
Measuring Money
Copyright  2011 Pearson Canada Inc.
3-9
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.
Copyright  2011 Pearson Canada Inc.
3 - 10