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Lecture 5: Money, Price Level and Inflation

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ECON 1010
Xueda Song

Lecture Five Money the Price Level and InflationFebruary 14 2012Questions to Think AboutMoney has taken many forms what is money todayWhat happens when the bank lends to someone else money that we have already depositingHow does the Bank of Canada influence the quantity of moneyWhat happens when the Bank of Canada creates too much moneyWhat is MoneyMoney is any commodity or token that is generally acceptable as a means of paymentA means of payment is a method of settling a debtMoney has three other functionsMedium of exchangeUnit of accountStore of valueMedium of ExchangeA medium of exchange is an object that is generally accepted in exchange for goods and servicesIn the absence of money people would need to exchange goods and services directly which is called barteringThis system prevailed during times when there was either a lack of physical money or before the invention of the monetary systemBartering is costly because it requires a double coincidence of wants which is very rareDouble coincidence of wants occurs when two people are seeking the opposite goodFor example someone who has an ipod and is looking for a blackberry comes across a person with a blackberry looking for an ipodUnit of AccountA unit of account is an agreed measure for stating the prices of goods and servicesFor example Canadian dollars US dollars ectStore of ValueAs a store of value money can be held for a time and later be exchanged for goods and servicesMoney in the United States TodayMoney in the United States consists of CurrencyDeposits at banks or other depository institutionsThe notes and coins held by households and firms are called currencyOfficial Measures of MoneyThere are two official measures of money in CanadaM1 and M2M1 consists of currency and cheque deposits of individuals and businessesM2 is everything in M1 plus all other forms of depositsAre M1 and M2 Really MoneyAll the items in M1 are means of payment
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