1. Copyright  2011 Pearson Canada Inc. 3 - 1 Chapter 3 What Is Money?

2. Copyright  2011 Pearson Canada Inc. 3 - 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

3. Copyright  2011 Pearson Canada Inc. 3 - 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

4. Copyright  2011 Pearson Canada Inc. 3 - 4 Functions of Money I 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.

5. Copyright  2011 Pearson Canada Inc. 3 - 5 Evolution of the Payments System Commodity Money Fiat Money Cheques Electronic Payment E-Money

6. Copyright  2011 Pearson Canada Inc. 3 - 6 Measuring Money I Float – funds in transit between the time a cheque is deposited and the time the payment is settled. Measures of Money Supply: –M2 –M3 –M2+

7. Copyright  2011 Pearson Canada Inc. 3 - 7 Measuring Money II

8. Copyright  2011 Pearson Canada Inc. 3 - 8 Money as a Weighted Aggregate The Bank of Canada’s money supply measures are ‘simple-sum’ indices, the index M = x 1 + x 2 + … + x n, Where x j 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

9. Copyright  2011 Pearson Canada Inc. 3 - 9 Measuring Money

10. Copyright  2011 Pearson Canada Inc. 3 - 10 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.