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ECON 1P92.docx

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Brock University
Professor Cottrel

ECON 1P92 03/12/13 Excess Reserves and Cash Drains Cash Drain:  Households keep a fixed fraction of their funds in cash  Deposit-creation process dampened  If c is the ratio of cash to deposits (C/D) that people want to maintain  Final change in deposits given by: o Change in deposits= (change in reserves)/(c+v) The Money Supply  Total quantity of money in economy at any time  Consists of currency plus various types of deposits  Kinds of Deposits: o Various definitions of the money supply o Depending on types of deposits included  Definitions of the Money Supply: o M1= currency plus demand (chequable) deposits o M2= M1 plus saving deposits at the commercial banks o M2+= M2 plus deposits at institutions that are not commercial banks (credit unions, trust companies, etc.) o Dealing with differentiation with M1 and M2 = multiple choice question Near Money and Money Substitutes Near Money:  Assets that are a store of value  Readily converted into a medium of exchange (money)  Not themselves money  Term deposit o Good store of value (earns interest) o Poor medium of exchange Money Substitutes:  Serve as a temporary medium of exchange  Not a store of value (i.e. credit card)  Choice between keeping money or chequing accounts o Depends on need for convenience vs. interest earnings Choosing a Measure  No perfect definition of money, near money, or a money substitute  New financial assets are continually being developed o Serve some or all functions of money The Role of the Bank of Canada  Commercial banking system can create a multiple expansion of bank deposits when it receives a new deposit  Shows that the money supply is related to the reserves of the banking system ECON 1P92 03/12/13  Control reserves 1 exam problem on 27, 2 exam problem on 28 Chapter 28: Money, Interest Rates, and Economic Activity Financial Assets 1. Money: currency plus chequable deposits 2. Bonds: bought and sold in bond market (promise to make payments at dates in the future  Present Value is the current value of one or more payments or receipts made in the future – the (discounted) present value (PV) of the bond Present Value and Market Price  PV of an asset is the highest price someone would pay to own the future stream of payments from the asset  Any price lower than the present value creates excess demand for the asset – drives up the
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