chapter 2: learning objectives
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Chapter 2: Learning Objectives. Functions and Efficiency of Money: from Barter to Monetary Exchange How should we Define Money? Canadian measures Monetary Standards & Systems: Types and Historical Experiences Consequence of Fiat Money: The Costs of Inflation. Barter . - PowerPoint PPT PresentationTRANSCRIPT
Copyright (c) 2006 McGraw-Hill Ryerson Limited
Copyright (c) 2006 McGraw-Hill Ryerson Limited
Chapter 2: Learning Objectives Functions and Efficiency of Money: from
Barter to Monetary Exchange How should we Define Money?
Canadian measures Monetary Standards & Systems: Types
and Historical Experiences Consequence of Fiat Money: The Costs
of Inflation
Barter A method of exchange by which goods
or services are directly exchanged for other goods or services without using a medium of exchange, such as money
Double coincidence Equal values of goods and services
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Copyright (c) 2006 McGraw-Hill Ryerson Limited
The Functions of Money
Medium of Exchange How transactions are conducted
Medium of account How the value of goods & services are denominated
Store of value and a standard of deferred payment How the value of goods & services are maintained
in monetary terms
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Monetary Standards
Commodity money Gold, Silver, and Bimetallic standards Gresham’s Law
Fiat money Paper money standard Canada’s early paper money history The introduction of central banking
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The Measurement of Money
Taking an Empirical approach Institutional aspects:
chartered vs. other types of financial institutions
types of deposits and their evolution: the growth of electronic transactions (Table 2.1)
Chartered Institutions A financial institution whose primary
roles are to accept and safeguard monetary deposits from individuals and organizations, and to lend money out.
A chartered bank in operation has obtained government permission on some level to do business in the banking sector
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Chartered banks provide the core financial intermediary services: individuals can easily deposit their funds into various types of accounts within a chartered bank, earning interest on their temporary savings
Chartered banks maintain a float of currency so they can process customers' daily transactions, but they lend out the majority of their deposits to individuals and commercial borrowers in an effort to stimulate economic growth
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The five largest banks in Canada Royal Bank of Canada Toronto Dominion Bank Bank of Nova Scotia Bank of Montreal Canadian Imperial Bank of Commerce
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Copyright (c) 2006 McGraw-Hill Ryerson Limited
Transactions Data
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The Measurement of Money
Taking an Empirical approach Institutional aspects:
chartered vs. other types of financial institutions
types of deposits and their evolution: the growth of electronic transactions (Table 2.1)
monetary aggregates: definitions and data Table 2.2 & Figure 2.1
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The Canadian Money Supply: Key Measures, August 2004
TABLE 2.2
M1: Cash and demand deposits
$162,368
M2: M1& savings deposits
$623,318
M3: M2 & term deposits
$868,017
M2+: M2 & deposits @ other deposit-taking institutions
$872,466
M2++: M2+ & MMMF and CSBs
$1,262,935
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Major Canadian Money Supply Aggregates
0
200000
400000
600000
800000
1000000
1200000
1400000
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
M2++
M2+
M1++
M1+M1
Year
Milli
ons
of d
olla
rs
Problem 1 Page 30
What are M1, M2, M2+, and M3 ? M1 = 1,000 + 13,000 = 14,000 M2 = 14,000 + 12,000 = 26,000 M2+ = 26,000 + 6,000 = 32,000 M3 = 26,000 + 9,000 = 35,000
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Copyright (c) 2006 McGraw-Hill Ryerson Limited
Currency in Circulation: Seasonally adjusted or unadjusted
8000
12000
16000
20000
24000
28000
32000
36000
40000
44000
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Seasonally AdjustedSeasonally Unadjusted
Milli
on o
f doll
ars
Year
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The Measurement of Money
Taking an Empirical approach Institutional aspects:
chartered vs. other types of financial institutions types of deposits and their evolution: the growth of
electronic transactions (Table 2.1) types of financial assets seasonal adjustment (Figure 2.2) Other refinements
Asset class Instrument typeSecurities Other cash
Debt (Long-term) Bonds LoansDebt (Short-term) Bills (T-bills,
Commercial Paper….)Certificate of Deposits (CDs)
Equity StockForeign Exchange Spot Foreign
Exchange
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Bonds A certificate of long-term debt issued by
a public entity or a corporation Issued at par value Coupon rate
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Underwriter An investment dealer who helps
governments and corporations to raise capital by buying new shares and resell them to investors
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Stock States of ownership The stock of a business is divided into
multiple shares A share has a certain declared face
value, commonly known as the par value of a share
Common stock and preferred stock.
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Copyright (c) 2006 McGraw-Hill Ryerson Limited
Inflation Versus Deflation
There are 2 types of inflation/deflation: Anticipated: there are NO surprise changes in
prices Unanticipated: SOME price changes are NOT
expected Most inflations/deflations are NOT FULLY anticipated
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The Costs of Inflation
Creditor vs. lenders: real interest rate effect Seigniorage: the profit from printing money “Shoe-leather” costs: frequent need for more
cash Tax implications: paying tax on inflation “Menu” costs: cost of frequent price changes Accounting problems: historical vs current
costs Inflation level and volatility: positively related Inflation and Economic growth: negatively
related
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What’s Special About Deflation? When prices fall the REAL value of debt rises
Debtors are penalized; borrowers benefit When prices fall EXPECTATIONS of additional
reductions are possible Consumers postpone purchases with further negative
economic implications If monetary policy responds by lowering interest
rates they could fall to zero At zero (nominal) interest rates cannot become negative This is called the “zero lower bound”
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Summary
Monetary systems are more efficient than barter systems Money has 3 functions
medium of exchange medium of account store of value
Canadian definitions of the money supply include M1, M2, M2+, M3
Excessive monetary expansion leads to inflation which is socially costly
Deflation is the opposite of inflation and can produce serious negative economic consequences