Chapter 15 The Monetary System. Outline oRole of money in the economy oCreation of money oControl of supply of money by the Bank of Canada.

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Presentation transcript:

Chapter 15 The Monetary System

Outline oRole of money in the economy oCreation of money oControl of supply of money by the Bank of Canada

Money oMoney is the set of assets in the economy that people regularly use to buy goods and services from other people o Money acts as a medium of exchange and can also serve as a store of value and a unit of account oWealth is the sum of all valuable assets owned minus liabilities

The Functions of Money oMedium of exchange is an item that buyers give to sellers when they purchase goods & services oA unit of account is the yardstick people use to post prices and record debts oA store of value is an item that people can use to transfer purchasing power from the present to the future

The Nature of Money oLiquidity is the ease with which an asset can be converted into the economy’s medium of exchange oMoney is the most liquid asset but it is far from perfect as a store of value oTrade off between liquidity and store of value determines the type of asset people wish to hold.

The Kinds of Money oCommodity money- money that takes the form of a commodity with intrinsic value oFiat money- money without intrinsic value that is used as money because of government decree oCurrency- includes the paper bills and coins in the hands of the public oDeposit money or demand deposits - money held by the public in the form of deposits in commercial banks that can be withdrawn on demand

Measures of Money oM1= currency+ demand deposits oM2= M1+ savings deposits+ personal term deposits oTerm deposit is tied up for a period of time and has a specified withdrawal time and pays a higher interest rate than demand deposits

Monetary Base,

M1 Supply,

M2 Supply,

The Bank of Canada oBasic Functions of the Bank: oBanker to the Commercial banks oBanker to the Government oController and regulator of money supply oRegulator and supporter of money markets

91- Day Treasury Bill yields,

Bank Rate- Monthly,

Bond (1-3 year) yields,

Money creation by the banking system oAssumptions: oOnly one kind of asset- loans, and only one kind of deposit- demand deposit oFixed reserve ratio= 20% oNo cash drain from the banking system (public holds a fixed amount of currency in circulation)

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