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Chapter 12

Chapter 12

5 Pages
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Department
Economics
Course Code
ECN 204
Professor
Amy Peng

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Chapter 12
The definition and functions of money
Money: any item that is generally acceptable to sellers in exchange for goods and
services
oMedium of exchange: items sellers generally accept and buyers generally use
to pay for a good or service
Barter: the exchange of one good or service for another
oMeasure of value:
Unit of account: a standard unit in which prices can be stated and the
value of goods and services can be compared
oStore of value: an asset set aside for future use/benefits
Liquidity: the ease with which an asset can be converted quickly into cash with little
or no loss of purchasing power.
Components of money supply
Money definition M1: Currency and demand deposits in chartered banks
oCurrency (coin and paper money)
Token money: coins that have a face value greater than their instrinsic
value.
Constitute about 24 percent of the economy’s narrowly define (M1)
oDemand deposits *chequing account deposits*
oInstitutions that offer demand deposits
Chartered banks: Royal bank, CIBC, Bank of montreal, Td, Bank of nova
scotia
oTwo qualifications:
when someone deposits the currency into a chequing account, it would
count that amount of the chequing deposit owned by that person; but also
www.notesolution.com
that amount would count to the banks cash drawer
any deposits of the federal government or the bank of vanada that are
held by chartered banks.
Money Definition M2: M1+near monies
oM2: a broad definition of money that includes M1 plus personal and business
saving deposits that require notice before withdrawal
oNear monies: financial assets, such as saving and term deposits in banks and
savings institutions that are not a medium of exchange but can be readily
converted into money (highly liquid)
Money definitions M2+ and M2++
oM2+: an even broader definition of money that includes M2 plus deposits at
credit unions, caisses populaires, trust companies, other nonbank deposit taking
institutions, and money market mutual funds.
oM2++: the broadest definition of the Canadian money supply; consist of M2+
plus Canada savings Bonds and non-money market mutual funds
What backs the money supply
Money as debt:
o if the government backed the currency with something tangible like gold,
then the dupply of money would vary with the amount of gold available. By
not backing the currency, the government avoids this constraint and indeed
receives a key freedom the ability to provide as much or as little money as
needed to maintain the value of money and to best suit the economic needs of
the country
oPromoting full employment, price level stability, and economic growth
Value of money
oAcceptability: its money because people accept them as money.
oLegal tender: it has be approved by the government as accepted in payment of
a debt
www.notesolution.com

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Description
Chapter 12 The definition and functions of money • Money: any item that is generally acceptable to sellers in exchange for goods and services o Medium of exchange: items sellers generally accept and buyers generally use to pay for a good or service Barter: the exchange of one good or service for another o Measure of value: Unit of account: a standard unit in which prices can be stated and the value of goods and services can be compared o Store of value: an asset set aside for future use/benefits • Liquidity: the ease with which an asset can be converted quickly into cash with little or no loss of purchasing power. Components of money supply • Money definition M1: Currency and demand deposits in chartered banks o Currency (coin and paper money) Token money: coins that have a face value greater than their instrinsic value. Constitute about 24 percent of the economy’s narrowly define (M1) o Demand deposits *chequing account deposits* o Institutions that offer demand deposits Chartered banks: Royal bank, CIBC, Bank of montreal, Td, Bank of nova scotia… o Two qualifications: when someone deposits the currency into a chequing account, it would count that amount of the chequing deposit owned by that person; but also www.notesolution.com that amount would count to the banks cash drawer any deposits of the federal government or the bank of vanada that are held by chartered banks. • Money Definition M2: M1+near monies o M2: a broad definition of money that includes M1 plus personal and business saving deposits that require notice before withdrawal o Near monies: financial assets, such as saving and term deposits in banks and savings institutions that are not a medium of exchange but can be readily converted into money (highly liquid) • Money definitions M2+ and M2++ o M2+: an even broader definition of money that includes M2 plus deposits at credit unions, caisses populaires, trust companies, other nonbank deposit taking institutions, and money market mutual funds. o M2++: the broadest definition of the Canadian money supply; consist of M2+ plus Canada savings Bonds and non-money market mutual funds What backs the money supply • Money as debt: o if the government backed the currency with something tangible like gold, then the dupply of money would vary with the amount of gold available. By not backing the currency, the government avoids this constraint and indeed receives a key freedom – the ability to provide as much or as little money as needed to maintain the value of money and to best suit the economic needs of the country o Promoting full employment, price level stability, and economic growth • Value of money o Acceptability: its money because people ac
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