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ECON202 (3)
Chapter 4

Chapter 4 Econ 202 Notes Looking for notes in .doc form and not .ppt? This is what you're looking for. With diagrams and and pictures from the textbook as well as Vaughn's in-class notes, this is the perfect set of study notes

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Department
Economics
Course
ECON202
Professor
Maryann Vaughan
Semester
Summer

Description
Money and Inflation In this chapter we will learnThe classical theory of inflation longrun o Causes o Effects o Social CostsClassicalassumes prices are flexible and markets clearApplies to the long run The Connection between Money and PricesInflation Ratethe percentage increase in the average level of pricesPriceamount of money required to buy a goodBecause prices are defined in terms of money we need to consider the nature of money the supply of money and how it is controlled Definition of MoneyMoneyis the stock of assets that can be readily used to make transactionsMedium of exchangewe use it to buy things o emphasizes that money makes exchange easier and more efficientStore of valuetransfers purchasing power from the present to the future o People will hold money only if they believe it will continue to have valueUnit of Accountthe common unit by which everyone measures prices and values o Identifies the convenience of having a widely recognized measure for accounting and transactions Money TypesFiat MoneyHas no intrinsic value o Example the paper currency we useCommodity MoneyHas intrinsic value o Example gold coins the value worth actually the money cigarettes in POW camps The Money Supply and Monetary Policy DefinitionsThe money supply is the quantity of money available in the economyMonetary Policy is the control over the money supply The Central BankMonetary policy is conducted by a countrys central bankIn Canada it is the Bank of Canada Control of the Money SupplyThis is one of the most important responsibilities of Canadas Central Bank the Bank of CanadaDecisions regarding the size of the money supply are the responsibility of the Governor of the Bank of CanadaWith input from the Federal Minister of FinanceAnd in constitute the governments monetary policyThe main method of control of the money supply is through open market operationsthe purchase of sale of outstanding government bonds bonds already issued by the government by the Bank of Canada Open Market OperationsIncrease the Money SupplyBank BUYS government bonds and securities from the public putting money in the circulationDecreasing the Money SupplyBank SELLS government bonds and securities to the public taking money out of circulationNote Money held by the Bank of Canada is not included in the money supply Types of MoneyB M1 M2 M2 M3remember the definitions The Quantity Theory of MoneyA simple theory linking the inflation rate to the growth rate of the money supplyBegin with the concept of velocity VelocityBasic Concept The rate at which money circulatesDefinition The number of times the average loony changes hands in a given time period o o Where VVelocityTvalue of All transactionsMMoney Supply
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