© 2008 Pearson Education Canada3.1 Chapter 3 What Is Money?

© 2008 Pearson Education Canada3.2 Meaning of Money Money - anything that is generally accepted in payment for goods or services or in the repayment of debts; a stock concept Wealth - the total collection of pieces of property that serve to store value Income - flow of earnings per unit of time

© 2008 Pearson Education Canada3.3 Functions of Money Medium of Exchange - promotes economic efficiency by minimizing the time spent in exchanging goods and services Unit of Account - used to measure value in the economy Store of Value - used to save purchasing power; most liquid of all assets but loses value during inflation

© 2008 Pearson Education Canada3.4 Functions of Money (Cont’d) If money is not unique as a store of value, why do people hold money? –The answer is liquidity, the relative ease and speed which an asset can be converted into a medium of exchange.

© 2008 Pearson Education Canada3.5 Evolution of the Payments System Commodity Money Fiat Money Cheques Electronic Payment E-Money

© 2008 Pearson Education Canada3.6 Measuring Money

© 2008 Pearson Education Canada3.7 Weighted Money as a Weighted Aggregate The Bank of Canada’s money supply measures are ‘simple-sum’ indices, the index M = x1 + x2 + … + xn, Where xj is one of the n monetary components of the monetary aggregate M Weighted monetary aggregates seem to predict inflation and the business cycle somewhat better than the conventional measures

© 2008 Pearson Education Canada3.8 Measuring Money

© 2008 Pearson Education Canada3.9 How Reliable are the Money Data? Revisions are issued because: –Small depository institutions report infrequently –Adjustments must be made for seasonal variation We probably should not pay much attention to short-run movements in the money supply numbers but should be concerned only with longer-run movements.