Moneyhastakenmanyforms.WhatismoneytodayWhat.pptVIP

Money has taken many forms. What is money today? What happens when the bank lends the money we’re deposited to someone else? How does the Bank of Canada influence the quantity of money? What happens when the Bank of Canada creates too much money? What is Money? Money is any commodity or token that is generally acceptable as a means of payment. A means of payment is a method of settling a debt. Money has three other functions: Medium of exchange Unit of account Store of value What is Money? Medium of Exchange A medium of exchange is an object that is generally accepted in exchange for goods and services. In the absence of money, people would need to exchange goods and services directly, which is called barter. Barter requires a double coincidence of wants, which is rare, so barter is costly. What is Money? Unit of Account A unit of account is an agreed measure for stating the prices of goods and services. Store of Value As a store of value, money can be held for a time and later exchanged for goods and services. What is Money? Money in the United States Today Money in the United States consists of Currency Deposits at banks and other depository institutions The notes and coins held by households and firm is called currency. What is Money? Official Measures of Money The two main official measures of money in Canada are M1 and M2. M1 consists of currency and chequable deposits of individuals and businesses. M2 consists of M1 plus all other deposits. What is Money? The figure illustrates the composition of M1 and M2 in November 2008. It also shows the relative magnitudes of the components. What is Money? Are M1 and M2 Really Money? All the items in M1 are means of payment. Some saving deposits in M2 are not means of payments—they are called liquid assets. Liquidity is the property of being instantly convertible into a means of payment with little loss of value. Deposits are money, but cheques are not—a cheque is an instruction to a bank to transfer money. Credi