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Unformatted text preview: Economics Midterm 2 Review Chapter 5: Asset Market What is Money? Money refers specifically to assets that are widely used and accepted as payment Most familiar forms of money are coins, paper money, or currency Another common form of money is chequable deposits, or bank accounts on which cheuques can be written for making payments Functions of Money Money has three useful functions in an economy: (1) Medium of Exchange: o In an economy with no money, trading takes place in the form of barter; or the direct exchange of certain goods for other goods o Barter, is generally an inefficient way to trade, b/c finding someone who has something you need and s willing to exchange that item for something you are willing to offer is both difficult and time consuming o In functioning, as a medium of exchange, money permits people to trade at less cost in time and effort o Having a medium of exchange also raises productivity as it allows people to specialize in economic activities they are most skilled at (2) Unit of account o As a unit of account, money is the basic unit for measuring economic value o For example, over here, all prices, wages, asset values and debts are expressed in dollars o Pricing all goods in dollars, simplifies comparison among different goods o In countries with high and erratic inflation, economic values are commonly stated in terms of a more stable unit of account (e.g US dollars) since otherwise prices will be constantly changing (local currency may still be used however) (3) Store of Value o As a store of value, money is a way of holding wealth o Any asset can be stored for value o These assets normally pay a higher return compared to money o However, most people still hold money b/c its usefulness as a medium of exchange makes it worthwhile to hold, even though its return is relatively low Measuring Money: The Monetary Aggregates Because assets differ in their moneyness, no single measure of the amount of money in the economy is likely to be completely satisfactory Therefore, many economists use several different measures of money stock, known as monetary aggregates The various monetary aggregates differ in how narrowly they define the concept of money In Canada, the two most widely used monetary aggregates are M1 and M2 The M1 Monetary Aggregate M1 consists primarily of currency and balances held in chequing accounts It is made up of currency held by the public, demand deposits (personal chequing accounts), and other chequable deposits (current accounts) Personal chequing accounts includes interest bearing chequable deposits, such as daily interest chequing accounts, while current accounts are held by firms The M2 Monetary Aggregate M2 is made up of everything in M1 plus other assets that somewhat less moneylike Main additional assets here include personal savings deposits and nonpersonal notice deposits Personal savings deposits include those with a fixed term, where early withdrawal usually involves a penalty The M2+ Monetary Aggregate...
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