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Macro Midterm 2 Notes...Chapters 24 and 25(Thorough)

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Western University
Economics 1022A/B
Lanfeng Yu

Econ 1022 Notes Midterm 2Chapter 24 What is MoneyMoney Is any commodity or token that is generally acceptable as a means of paymentis a method of settling debt Means of PaymentMoney serves three functionsThey are 1 Medium of Exchange 2 Unit of Account 3 Store of Value Medium of ExchangeAny object that is generally accepted in exchange for goods and servicesWithout a medium of exchange goods and services must be exchanged directly for other goods known as barteringA barter requires a double coincidence of wantsMedium of exchange overcomes double coincidence of wantsMoney acts as a medium of exchange because people with something to sell will always accept money in exchange for itNote Money isnt the only medium of exchange there are credit cards but credit cards are not moneyUnit of Account Agreed measure for stating price of goods and seriesTo get the most out of our budget you have to consider opportunity costMoney makes it easy to figure out the opportunity cost of any pair of goods or servicesStore of Value Something that can be held and exchanged later for goods and seriesMoney is a store of valueIf money were notstore of value it couldnt serve as a means of paymentNote Money isnt the only store of valueA house a car or art work are other examplesThe more stable the value of a commodityor token the better it can act as a store of value and the more useful it is as moneyInflation lowers the value of money and the values of other commodities and tokens that are used as moneyTo make money as useful as possible as a store of value a low inflation rate I needed Money in Canada Day In Canada money consists ofCurrencyDeposits at banks or other depository institutions CurrencyNotes or coins held by individuals and businesses are known as currencyNotes are money because the government declares them soCurrency is the most convenient type of money for settling small debts and buying low priced items DepositsDeposits of individuals and businesses at banks and other depository institutions trust and Mortgage Company credit unions and caisses populaires and also converted to moneyOfficial Measures of Money There are two official measures of money in Canada o M1 o M2M1 consists of currency and chequable deposits of individuals and businesses It does not include currency held by banks or currency and chequable checkable deposits of the government of CanadaM2 M1 plus all other depositsNote M1 is money because it consists of currency plus deposits and each is a means of paymentsNote Some savings deposits are liquid assetscan be converted to cash quickly As a result M2 is also counted as moneyA cheque is not moneyA Credit card is not moneyThe Banking System The banking system consists of private and public institutionsThe institutions play a crucial role in financial markets and have profound effects on overall economic performanceThe banks can be divided into three groups o Depository Institutions o Bank of Canada o Payment System
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