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Chapter 24 econ.docx

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York University
ECON 1010
Steven Edwards

Chapter 24: Money, the Price Level, and Inflation What is Money?  Any commonditiy or token that is generally acceptable as a means of payment  Means of payment is a method of settling a debt  Money has 3 functions: medium of exchange, unit of account, store of value Medium of Exchange  Any object that is generally accepted in exchange for goods and services; withput it, G and S must be exchanged directly for other G and S; ancient shit called bartering  Requires double coincidence of wants, shits rare though.  Medium of exhchange overcomes double coincidence of wants Unit of Account  Is an agreed measure for stating the prices of goods and services Store of Value  Can be held and exchanged later for goods and services. If money were not, it could not serve as a means of payment  Other commodities can serve as a store of value however the more stable to commoditiy the better it is as a store of value  Need a low inflation rate maximizes money as a store of value Money in Canada Today Money consists of  Currency  Deposits at banks and other depository institutions Currency  The notes and coins held by an insititution are known as currency  Money because the government declares them as money Deposits  Deposits at banks or other depository institutions count as money  Money because the owners of the deposits can use them to make payments Official Measures of Money  M1 and M2  M1- currency and chequable deposits of individuals and businesses (doesn’t include currency held by banks, or currency and chequable deposits of the government of Canada)  M2- M1 + all other deposits Are M1 and M2 Real Money?  Money is a means of payments this is key  Currency is money  Deposits? Chequable deposits are money because they can be transferred from from one person to another  M1 is currentcy + chequable deposits so M1 is money  Some savings deposits are not means of payments= liquid assets= liquidity property of ease of being convereted into a means of payment without a loss in value= M2=Money Deposits are Money but Cheques are Not  Cheques are not money  There is no extra money, money is just being transferred and moved. (bank example) Credit Cards are Not Money  Credit card works as an ID card…that lets you take out a loan the instant you buy something. You have to pay it back. Its not the means of payment. Its not money The Banking System  Divided into three groups: depository institutions, the bank of Canada, the payments system Depository Institutions  Private firm that takes deposits from households and firms and makes laons to other households and firms. Deposirs of three typews of depository intisitutions make up Canada’s money: Chartered banks, credit unions and caisse popularrires, trust and mortgage loan companies Chartered Banks  Private firm, under bank act of 92 to receive deposits and make loans  Largest of banking systrems Credit Unions  Cooperative organization that operates under the Cooperative Credit Association Act of 92 and recives deposits from and makes loans to its members Trust and Mortgage Loan Companiews Privately owned depository institution that operates under the trust and loan companies act of 92. Recieves deposits, makes loans, and act as trustee for pension finds and for estates What Depository Insitutions do  Provides cheque clearing services, account management, credit cards, internet banking, collecting service fees  Buy securites to make more money  Do this buy buying securities that earn a higher interest rate than what they pay to depositors. Balancing act, chatered bank example  Chartered bank puts funds it recives into four types of assets 1. Reserves-notes and coins in a banks vault or in a deposit account at the Bank of Canada; used to meet depositors currency withdrawls and to make payments to other banks (keeps half of a percent of deposits as reserves) 2. Liquid Assets- treasury bills and commercial bills. First line of D if they need reserves. Cam be sold and concerted with no risk. Low interest 3. Securities-governeent bonds and other types of bonds. Can be converted to reserves but prices fluctuate. Riskier, and higher interest rate 4. Loans-commitments of finds for an agreed upon time. Riskiest. Cant be converted until they are due to be repaid, default. Higher interest rate Economic Benefits Provided by Depository Insitutions  Create liquidity- borrowing short term, lending long  Pool risk- default loans on 1 person you lose everything, with 1000 people you lose almost nothing. Pools interest  Lower the cost of borrowing-  Lower the cost of monitoring borrowers- lenders can encourage good decisions that prevent defaults. Costly. Depository institutions can perform this task at a much lower cost Bank of Canada  Canada’s central bank, supervises other banks and financial institutions, financial markets, and the payments system, condicts monetary policy. The banks of Canada is the banker to banks and government, lender of last resort, sole issuer of bank notes Banker to Banks and Government  Works with chartered banks, credit unions, and caisse populaires, and trust and mortgage loan companies that make up the banking system; the government of Caanda; centreal banks of other governments  Accepts deposits; part of reserves Lender of Last Resort  Makes loans to banks  Last resort means that if another banks needs reserves they are ready to make loans to banks Sole Issuer of Banks Notes  Only bank that issues bank notes  Monopoly on this type of shit The Bank of Canada’s Balance Sheet  Changes interest rates  Does this by changing the quantity of money in the economy  Depends on the size and composition of its balance sheets: assets and liabilities Bank of Canada Assets: 2 main assets 1. Government securties 2. Loans to depository institutions  Holds governemt of Canada securities (treasury bills) that it buys in the bills market  Bank of Canada makes loans  They can borrow when short of reserves Liabilities 1. Bank of Canada notes 2. Depository institution deposits  Notes bank notes  Some are held by people and businesses; in bank vaults. The Monetary Base  Bank of canadas liabiilitises together wuth coins issued by the royal Canadian mint (coins are not liabiliteies of the Bank of Canada) make up the monetary base  Sum o bank of Ca
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