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
Copyright 2011 Pearson Canada Inc. 3 - 1 Chapter 3 What Is Money? 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 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 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. Copyright 2011 Pearson Canada Inc. 3 - 5 Evolution of the Payments System • Commodity Money • Fiat Money • Cheques • Electronic Payment • E-Money 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+ Copyright 2011 Pearson Canada Inc. 3 - 7 Measuring Money II 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 Copyright 2011 Pearson Canada Inc. 3 - 9 Measuring Money 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.