Chapter 3: What Is Money? PDF

The Economics of Money, Banking, and Financial Markets Eighth Canadian Edition Chapter 3 What Is Money? Copyright © 2023 Pearson Canada Inc. 3-1 Learning Objectives 1. Describe what money is 2. L...

The Economics of Money, Banking, and Financial Markets Eighth Canadian Edition Chapter 3 What Is Money? Copyright © 2023 Pearson Canada Inc. 3-1 Learning Objectives 1. Describe what money is 2. List and summarize the THREE functions of money 3. Identify different types of payment systems 4. Compare and contrast the M1 and M2 money supplies Copyright © 2017 Pearson Canada Inc. 3-2 Three Functions Medium of Exchange Unit of Account Store of Value Copyright © 2017 Pearson Canada Inc. 3-3 Money Money is anything that is generally accepted in payments for goods and services. Copyright © 2017 Pearson Canada Inc. 3-4 The History of Money The Shell Money Durable Easy to carry around Easily recognizable Natural beauty Copyright © 2017 Pearson Canada Inc. 3-5 Copyright © 2017 Pearson Canada Inc. 3-6 Stone Money on Yap Island Copyright © 2017 Pearson Canada Inc. 3-7 Federal Reserve Bank of New York Copyright © 2017 Pearson Canada Inc. 3-8 Copyright © 2017 Pearson Canada Inc. 3-9 Ancient Money Copyright © 2017 Pearson Canada Inc. 3 - 10 Meaning of Money Money: Anything that is generally accepted in payment for goods or services or in the repayment of debts. – Currency: paper money and coins Copyright © 2017 Pearson Canada Inc. 3 - 11 Functions of Money: Medium of Exchange Medium of Exchange: – Facilitates exchange (lower transaction costs) – Eliminates need for double coincidence of wants An effective medium of exchange must: – be easily standardized – be widely accepted – be divisible – be easy to carry – not deteriorate quickly Copyright © 2017 Pearson Canada Inc. 3 - 12 Functions of Money: Unit of Account Unit of Account: – Units in which value is denominated throughout the economy – Reduces transaction costs Consider a store with 10 goods – Without a unit of account, we would need to know 45 prices to exchange one good for another – With a unit of account, we only need 10 prices as everything would be reported in dollars Copyright © 2017 Pearson Canada Inc. 3 - 13 Functions of Money: Store of Value Store of Value: – Repository of purchasing power over time – Other assets also serve this function (stocks, bonds, land, houses, art, jewelry, etc…) – Money is the most liquid of all assets but does not pay a return, so loses value during inflation – Money is particularly poor store of value during periods of hyperinflation – when inflation exceeds 50% per month Copyright © 2017 Pearson Canada Inc. 3 - 14 Evolution of the Payments System (1 of 2) Payments System: method of conducting transactions in the economy Commodity Money – Money made of precious metals (gold, silver) – Valuable, easily standardized and divisible commodities – Problem: hard to transport Fiat Money – Paper money decreed by governments as legal tender Copyright © 2017 Pearson Canada Inc. 3 - 15 Evolution of the Payments System (2 of 2) Cheques – An instruction to your bank to transfer money from your account to someone else’s account – Lowers transaction costs, but take times to clear Electronic Payments E-Money (electronic money) – debit cards, smart cards, e-cash Copyright © 2017 Pearson Canada Inc. 3 - 16 Open Banking It is a system that provides a user with a network of financial institutions’ data through the use of application programming interfaces (APIs). Copyright © 2017 Pearson Canada Inc. 3 - 17 Are We Headed for a Cashless Society? Copyright © 2017 Pearson Canada Inc. 3 - 18 Are We Headed for a Cashless Society? Predictions of a cashless society have been around for decades E-money might be more convenient and efficient than a payments system based on paper Several factors work against the disappearance of the paper system The use of e-money will likely still increase in the future Bitcoins? Copyright © 2017 Pearson Canada Inc. 3 - 19 Bitcoin Copyright © 2017 Pearson Canada Inc. 3 - 20 Copyright © 2017 Pearson Canada Inc. 3 - 21 Bitcoin Copyright © 2017 Pearson Canada Inc. 3 - 22 Copyright © 2017 Pearson Canada Inc. 3 - 23 Measuring Money Bank of Canada’s Monetary Aggregates – M1+ = currency + chequable(demand+notice) deposits – M2 = currency + bank deposits + fixed-term deposits – M2+ = M2 + deposits at TMLs and CUCPs – M2++ = M2+ + certain retail debt instruments – M3 = M2 + non-personal term deposits + foreign currency bank deposits Copyright © 2017 Pearson Canada Inc. 3 - 24 Money Aggregates in US Copyright © 2017 Pearson Canada Inc. 3 - 25 Measures of Monetary Aggregates (1 of 4) Copyright © 2017 Pearson Canada Inc. 3 - 26 Measures of Monetary Aggregates (2 of 4) Copyright © 2017 Pearson Canada Inc. 3 - 27 Measures of Monetary Aggregates (3 of 4) Copyright © 2017 Pearson Canada Inc. 3 - 28 Measures of Monetary Aggregates (4 of 4) Table 3-1 Measures of Monetary Aggregates and Their Components Asset M1+ M1++ M2 M2+ M2++ M3 Currency outside banks ✓ ✓ ✓ ✓ ✓ ✓ Personal deposits at chartered banks Blank Blank ✓ ✓ ✓ ✓ Non-personal demand and notice deposits at chartered banks Blank Blank ✓ ✓ ✓ ✓ Fixed-term deposits Blank Blank ✓ ✓ ✓ ✓ Deposits at trust and mortgage loan companies (TMLs) Blank Blank Blank ✓ ✓ Blank Deposits at credit unions and caisses populaires (CUCPs) Blank Blank Blank ✓ ✓ Blank Life insurance company individual annuities Blank Blank Blank ✓ ✓ Blank Personal deposits at government-owned savings institutions Blank Blank Blank ✓ ✓ Blank Money market mutual funds Blank Blank Blank ✓ ✓ Blank Canada Savings Bonds and other retail instruments Blank Blank Blank Blank ✓ Blank Non-money market mutual funds Blank Blank Blank Blank ✓ Blank All chequable deposits at chartered banks, TMLs, and CUCPs ✓ ✓ Blank Blank Blank Blank All nonchequable deposits at chartered banks, TMLs, and CUCPs Blank ✓ Blank Blank Blank Blank Non-personal term deposits at chartered banks Blank Blank Blank Blank Blank ✓ Foreign currency deposits of residents at chartered banks Blank Blank Blank Blank Blank ✓ Note Monetary aggregates exclude interbank deposits and include continuity adjustments. In January 2007, the monetary aggregates were redefined to reflect (i) the elimination of demand deposits and (ii) the inclusion of private-sector float. Copyright © 2017 Pearson Canada Inc. 3 - 29 Growth Rates of Monetary Aggregates Does it matter which measure of money is considered? Aggregates can move in different directions in the short run Conclusion: the choice of monetary aggregate is important for policymakers Copyright © 2017 Pearson Canada Inc. 3 - 30 Growth Rates of M2, M1++, M2++ Copyright © 2017 Pearson Canada Inc. 3 - 31 FYI: Where Are All the Dollars? There is almost $2000 of currency held per person in the Canada and over $4000 of U.S. currency per person in the United States – Do you know anyone who carries $2000 in their pocket? Where are all these dollars and who is holding them? – Criminals – Foreigners (especially for U.S. dollars) Copyright © 2017 Pearson Canada Inc. 3 - 32 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 Copyright © 2017 Pearson Canada Inc. 3 - 33