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Chapter 4

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ECON 2000
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Econ Chapter 4 NotesInflationOverall increase in prices Rate change in overall level of pricesOne time increase in cost of living is not inflation only ongoingInflation in Canada has been moderate Russia Germany all experienced hyperinflation What is MoneyMoneyStock of liquid financial assets that can be readily used to make transactions dollars in handMoney acts as a Store of Value Unit of Account and Medium of ExchangeStore of Valuemoney is a way to transfer purchasing power from the present to the futureEx can work today earn money and hold to spend in future Unit of AccountMoney provides the terms in which prices are quoted and debts are recorded Unit in which we measure economic transactions usually in dollarsMedium of Exchangemoney is what we use to buy gs Ease with which an asset can be converted to MoE is called liquidity money most liquid assetBarter EconomyWithout money trade requires double coincidence of wants which is unlikelyFiat moneymoney that has no intrinsic value since its established as money by govt decree or fiatCommodity moneycommodities with some intrinsic value for moneyEx Gold Use gold as money economy is on a gold standard because it can be used for various purposes Jewelry dental filling transactions Case Study Pg 8889Development of Fiat Money At some point in time commodity money arises to facilitate exchange trade gold because it has intrinsic valueFiat economy created by If we trade with just gold buyer measures appropriate amount of gold as long as seller convinced that weightpurity of it is correct government gets involved in monetary system to reduce transaction costs raw gold is costly since it takes time to verify purity and quantity to reduce costs govt uses mint gold coins with known details Then govt accepts gold from public in change for gold certificates redeemed for certain amount of gold bills easier to use becomes standard gold backing becomes irrelevant if no one bother to redeem bills for gold and people accept paper bills in exchange value as money now and so the commodity system evolves into the fiat system Social convention because people value fiat money expecting everyone else to as well How Quantity of Money is ControlledEcon Chapter 4 NotesMoney Supplyquantity of money available in economy amount of commodity in commodity moneyMonetary Policygovernments control over money supply Monetary policy delegated to partially independent institution called Central BankCanada central bank is Bank of CanadaPower to make monetary policy decisions rests with federal cabinet minister of Finance communicates overall desires of govt to governor of the bank and governor implements those instructions on day to day basis for 15 years goal is to ensure annual inflation rate with 13 Lose faith in Governor cant fire himher first issue instructions concerning changes if Governor feel policy is inappropriate they must resign but Governor has power since resignation by must preceded by formal directive written document bin which government says what it wants done This makes everything public and govt dont want to force Governor resignation unless they want public scrutiny Open Market Operations BoC controls supply of moneyPurchase and Sale of government bonds mainly treasury bills To increase Supply of Money BoC uses dollars to buy govt bonds from public and this purchase increase quantity of dollars in circulation opposite appliesHow the Quantity of Money is MeasuredIncluded in Quantity of Money Currency Sum of outstanding paper money and coins common medium of exchangeDemand Deposits Used in TransactionsFunds people gold in chequing accounts If sellers accept personal cheques this is convenient Funds in Savings AccountEasily transferred into chequing account convenient and similar accounts like in trust companies and Caisses Populaires included as wellMeasures of Money BCurrencychartered bank deposits at Bank of Canada M1Sum of currency in circulation demand deposits and other chequing deposits at chartered banksM2M1personal savings deposits and nonpersonal notice deposits at chartered banksM2M2 plus all deposits and shares at trust companies mortgage loan companies credit unions and Caisses populairesM3M2fixed term deposits of firms at chartered BanksCredit CardsNot included in quantity of money rather a method of deferring payment repay bank
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