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

© 2008 Pearson Education Canada3.1

Chapter 3Chapter 3What Is Money?

© 2008 Pearson Education Canada3.2

Meaning of MoneyMeaning 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 MoneyFunctions 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 Functions of Money (Cont’d)(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 Evolution of the Payments SystemSystem

• Commodity Money

• Fiat Money

• Cheques

• Electronic Payment

• E-Money

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Measuring MoneyMeasuring Money

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Money as a WeightedWeighted 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 MoneyMeasuring Money

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How Reliable are the How Reliable are the Money Data?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.