unit 4 - ch 12- adjusted

8/9/2019 Unit 4 - Ch 12- Adjusted

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Copyright © 2012 by McGraw-Hill RyersonLimited. ll rights reser!ed.

Understanding Economics6th edition

by Mark Lovewell


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Understanding Economics

Chapter 12

Money

Copyright © 2012 by McGraw-Hill Ryerson Limited. ll rights reser!ed.

"th editionby Mar# Lo!ewell


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Learning $b%ecti!es&ter this chapter yo' will be able to(

1. o'tline the &'nctions o& money) itscomponents) and the !ario's de*nitions o&money

2. 'nderstand the demand &or and s'pply o&money and e+'ilibri'm in the money mar#et

,. eplain how money is created and de*ne themoney m'ltiplier



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he /'nctions o& Money here are three main &'nctions that money

per&orms(a means o& echange it o!ercomes the need

&or barter

a store o& p'rchasing power

a meas're o& !al'e



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eposit-a#erseposit-ta#ers(accept &'nds pro!ided by sa!ers and lend these

&'nds to borrowers

hold cash reser!es to meet the needs o&depositors withdrawing &'nds



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he Canadian /inancial

3ystem he &o'r traditional pillars o& the Canadian

*nancial system were(chartered ban#s

tr'st companies

ins'rance companies

in!estment dealers

/inancial dereg'lation has allowed instit'tionsin each pillar to per&orm a wider range o&&'nctions



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Chartered 4an#s and 5ear 4an#s

Chartered ban#s are deposit-ta#ers allowed bycharter to o6er a wide range o& *nancialser!ices.

5ear ban#s are deposit-ta#ers that are notchartered and ha!e more speciali7ed ser!ices.

hey incl'de(

tr'st companiesmortgage loan companies

credit 'nions and caisses populaires



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Chartered 4an#s and 5ear 4an#s inCanada/ig're 12.1) 8age ,,0



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Components o& the Money 3'pply a

here are !ario's possible components o& themoney s'pply(C'rrency incl'des notes and coinage.

emand deposits are &'nds to which depositorsha!e immediate access.

5otice deposits are &'nds &or which deposit-ta#ersmay re+'ire notice &or withdrawals.

erm deposits are &'nds to which depositors ha!eno access &or a *ed period.



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Components o& the Money 3'pply b

/oreign c'rrency deposits are &'nds held byCanadian residents that are !al'ed in &oreignc'rrency.



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Money e*ned a here are *!e common de*nitions o& money in

Canada(M1 incl'des c'rrency o'tside chartered ban#s

and p'blicly held demand deposits at charteredban#s.

M19 consists o& M1 pl's che+'able noticedeposits and chartered ban#s and near ban#s.

M2 consists o& M1 pl's notice deposits andpersonal term deposits at chartered ban#s.



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Money e*ned bM, consists o& M2 pl's nonpersonal term

deposits and &oreign c'rrency deposits atchartered ban#s.

M29 consists o& M2 pl's corresponding depositsat near ban#s and some other li+'id assets.



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he Canadian Money 3'pply/ig're 12.2) 8age ,,2



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Choosing a e*nition a 3ome economists belie!e that M19 is the

most acc'rate de*nition o& the money s'pply.

$ther economists pre&er M29) especiallybeca'se o& recent inno!ations in paymentsmethods.Credit cards ma#e it more con!enient &or

p'rchasers to 'se deposits &or paymentsp'rposes by borrowing &'nds &or short periods.



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Choosing a e*nition bebit cards add to the con!enience o& 'sing

deposits &or payment p'rposes by allowing&'nds to be electronically mo!ed &rom these

deposits.



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Money emand a here are two types o& money demand( ransactions demand is related to money:s 'se

as a means o& echange and !aries directly withreal o'tp't and the price le!el.

sset demand is related to money:s 'se as astore o& p'rchasing power and is in!erselyrelated to the nominal interest rate.



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Money emand and Money

3'pplyMoney demand(represents the amo'nts o& money demanded

&or both transactions and asset demandp'rposes at all possible interest rates

is represented by a sched'le or c'r!e

Money s'pply(

is a set amo'nt determined by go!ernmentdecision-ma#ers

is represented by a sched'le or c'r!e



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he emand &or Money/ig're 12.,) 8age ,,;


Money emand C'r!e

0 10 20 ,0


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he 3'pply o& Money/ig're 12.


Money 3'pply C'r!e

0 10 20 ,0


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+'ilibri'm in the Money Mar#et

+'ilibri'm in the money mar#et occ'rs at theintersection o& the money demand and moneys'pply c'r!es.

he e+'ilibri'm interest rate is in!erselyrelated to the money s'pply.



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+'ilibri'm in the Money Mar#et/ig're 12.=) 8age ,,>


3'rpl's

3hortage

Dm

Sm

Money emand and3'pply C'r!es

0 10 20 ,0


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Money Creation aesired reser!es are the minim'm cash

reser!es that deposit-ta#ers hold to satis&yanticipated withdrawal demands.

he reser!e ratio e+'als desired reser!esdi!ided by deposits.

cess reser!es e+'al cash reser!es min's

desired reser!es. s long as ecess reser!es eist) new money

will be created.



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$pening a eposit/ig're 12.") 8age ,


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Granting a Loan/ig're 12.;) 8age ,


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ithdrawing a eposit/ig're 12.>) 8age ,


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ccepting eposit /'nds/ig're 12.) 8age ,


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Granting a Loan/ig're 12.10) 8age ,


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Money Creation b he money m'ltiplier(is the !al'e by which an amo'nt o& ecess

reser!es is m'ltiplied to gi!e the maim'm

change in the money s'pplye+'als 1Jthe reser!e ratio

he act'al money s'pply change is less thanthe maim'm amo'nt &o'nd 'sing the abo!e&orm'la beca'se o& p'blicly held c'rrency andnon-monetary deposits.



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e re hat e Ma#eHarold Annis(o'tlined the staples thesis) which highlights the

role o& staple prod'cts e.g. *sh and &'rs in

Canada:s economic de!elopmentde!ised a comm'nications theory) which

classi*es societies based on whether they 'se atime-biased medi'm e.g. parchment or space-

biased medi'm e.g. paper



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s Good as Gold $LC a

8recio's metals began to be 'sed as money;000 years ago.

he *rst coins were de!eloped in the ;th cent'ry 4C in what is now 'r#ey.

arly coins were &'ll-bodied) and cheaterstried to ma#e a pro*t by employing practices

#nown as clipping and hollowing. An addition)r'lers sometimes debased their c'rrencies.



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s Good as Gold $LC b

Gresham:s Law states that Kcheap moneyalways dri!es Kdear money o't o& circ'lation.

8aper money *rst appeared in China in the ;th cent'ry C.

An 'rope) the introd'ction o& paper moneywas closely tied to the e!ol'tion o& ban#s.



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s Good as Gold $LC c

4y the 1;th cent'ry) the certi*cates o& depositiss'ed by ban#s were being generallyaccepted as money) *rst in ngland and the

5etherlands) and then more generally in'rope.

8aper c'rrency in the 'ropean world datesbac# to the 1;th cent'ry also. he colony o&5ew /rance was an early pioneer with its 'seo& playing cards.



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s Good as Gold d

'ring the 1th and early 20th cent'ries)'rope and 5orth merica were on the goldstandard.

his standard meant that a 'nit o& paperc'rrency co'ld be echanged &or a certainamo'nt o& gold.

he gold standard *nally lapsed in Canadaand other co'ntries d'ring the Greatepression.



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Understanding Economics

Chapter 12

The End


"th editionby Mar# Lo!ewell

unit 4 - ch 12- adjusted

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