Ch.10 - Money, Banks, Bank of Canada

Define The function of money "Medium of exchange"

Exchange Money serves as a medium of exchange when sellers are willing to accept it in exchange for goods or services. An economy is more efficient when a single good is recognized as a medium of exchange.

Define The function of money "Standard of Deferred Payment "

Money can facilitate exchange at a given point in time by providing a medium of exchange and unit of account, and it can facilitate exchange over time by providing a reliable store of value and standard of deferred payment in borrowing and lending.

Define money and assets

Money: Assets that people are generally willing to accept in exchange for goods and services or for payment of debts. Assets: Anything of value owned by a person or a firm.

Define Reserves, Desired Reserves and Excess Reserves

Reserves: Deposits that a bank keeps as cash in its vault or on deposit with the Bank of Canada. In 2011, banks kept about 5 percent of their deposits as reserves. These reserves are called desired reserves. The minimum fraction of deposits that banks desire to keep as reserves is called the desired reserve ratio . We can abbreviate the desired reserve ratio as r d . Any reserves that banks hold over and above the desired amounts are called excess reserves.

NAME Four functions of money

1. Medium of exchange 2. Unit of account 3. Store of value 4. Standard of deferred payment

What can serve Money? Five criterias:

1. The good must be acceptable to (that is, usable by) most people. 2. It should be of standardized quality so that any two units are identical. 3. It should be durable so that value is not lost by spoilage. 4. It should be valuable relative to its weight so that amounts large enough to be useful in trade can be easily transported. 5. The medium of exchange should be divisible because different goods are valued differently.

Define The function of money "Store of Value"

Any asset represents a store of value. Liquidity is the ease with which an asset can be converted into the medium of exchange. Although money is the most liquid asset, other assets offer a greater return as a store of value.

Commodity Money vs. Fiat Money

Commodity: Independent of its use as money, the value of commodity money, such as gold, depends on its purity. Fiat: In modern economies, paper currency is generally issued by a central bank, which is an agency of the government that regulates the money supply.

Discuss the definitions of the money supply used in Canada today. - M1+ and M1++

M1+ ~The narrowest definition of the money supply: It includes currency and other assets that have cheque writing features 1). Currency- paper money & coins in circulation 2). Value of Chequable deposits at banks, trust and mortgage loan companies, and credit unions M++ ~all that M1+ includes, as well as non-chequable deposits at banks, TMLs, and CUCPs.

M3

M3 includes everything that is in M2 plus non-personal term deposits at chartered banks, and foreign currency deposits of residents at chartered banks.

Define The function of money "Unit of Account"

Once a single good is used as money, each good has a single price rather than many prices as in a barter system. This gives buyers and sellers a unit of account, a way of measuring value in the economy in terms of money.

Two key points to keep in mind about money supply

The money supply consists of both currency and chequing and non-chequing account deposits. Because balances in chequing and non-chequing account deposits are included in the money supply, banks play an important role in the way the money supply increases and decreases.

Define M2

includes currency, personal deposits at chartered banks, non-personal demand and notice deposits at chartered banks, and fixed-term deposits.

M2++

is the broadest definition of the money supply in Canada and includes everything that is in M2+ as well as Canada Savings Bonds and other retail instruments, and non-money market mutual funds.

Define M2+

money supply includes everything that is in M2 plus deposits at TMLs, deposits at CUCPs, life insurance company individual annuities, personal deposits at government-owned savings institutions, and money market mutual funds.