#5 Money Inflation & Monetary System 2(2) (1).pptx -...

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Money Money facilitates trade – it makes trade easier – otherwise trade would require the presence of “ double coincidence of wants What is money? Money is the set of assets in an economy that people regularly use to buy goods and services from other people. Important: “Money" “Wealth" Money is the economy's medium of exchange, hence, it is the most liquid asset. Liquidity The ease at which an asset can be converted into the economy's medium of exchange. oney, Inflation & the Monetary System
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Functions of Money are : # 1. A Medium of Exchange # 2. A Unit of Account / Measure of Value / Means of Valuation # 3. Store of Value # 4. Standard of Deferred Payment The characteristics of money to carry out these functions are : durability portability divisibility uniformity limited supply acceptability
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Types of money Commodity money Commodity-backed paper money - Takes the form of a commodity with intrinsic value Example: Gold, cigarettes. - Paper money that exchanges for a fixed quantity of a commodity of iintrinsic value Example: U.S. $ under the gold standard Fiat money - Money without intrinsic value that is used as money because of government decree. Example: NZ$ notes today.
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Money in the economy What is the quantity of money in an economy? RBNZ aggregates: Notes and coins held by the public – the monetary base M1 - Notes and coins plus transaction account balances -chequable, EFTPOS or sweep accounts deposits – most liquid part of the money supply M2 - all call deposits – includes other highly liquid assets M3 – all funding ie deposits – here money is more a store of value than as a medium of exchange Note : credit cards are a means of deferring payment
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Reserve Bank Act of 1989, New Zealand the first country to legislate inflation stability as the sole objective of monetary policy. The objectives of monetary policy are set out by the Minister of Finance in the Policy Target Agreement (PTA). Currently the policy target is for an inflation rate between 1% and 3%. 2018 PTA: https :// ta2018 Monetary policy – the management of liquidity conditions (money supply) in the economy by the central bank Examples: US Federal Reserve, Bank of England The Reserve Bank of New Zealand (RBNZ) Reserve Bank of Australia (RBA) Bundesbank – German central bank e Reserve Bank of New Zealand (RBNZ) – NZ’s Central Bank
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Fractional Reserve Banking Commercial banks hold only a fraction of deposits as reserves.
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