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Lecture 15 - ECO100 - Introduction to Introduction...

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© Gustavo Indart Slide 1 ECO 100Y ECO 100Y Introduction to Introduction to Economics Economics Lecture 15: Lecture 15: The Banking System and The Banking System and the Supply of Money the Supply of Money
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© Gustavo Indart Slide 2 Two Views of Money Two Views of Money Classical view: ¾ Changes in money supply lead to equal proportional changes in all prices ¾ Therefore, no change in relative prices ¾ Money is neutral (i.e., doesn’t affect the level of real output) Modern view: ¾ Money is neutral only in the long-run ¾ Changes in money supply lead to increases in real output in the short-run
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© Gustavo Indart Slide 3 Definition and Functions of Definition and Functions of Money Money Money is a medium of exchange ¾ A medium of exchange is anything that is acceptable in exchange for goods and services Functions of money: ¾ A medium of exchange ¾ A unit of account ¾ A standard of deferred payments ¾ A store of value
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© Gustavo Indart Slide 4 Different Forms of Money Different Forms of Money Commodity money Convertible paper money Fiat money Deposit money
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© Gustavo Indart Slide 5 Three Measures of Money Three Measures of Money M1 – currency in circulation + demand deposits M2 – M1 + notice deposits M3 – M2 + fixed-term deposits
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© Gustavo Indart Slide 6 Definitions Definitions Money supply: ¾ M = CU P + D Currency: ¾ CU = CU P + CU B Bank Reserves: ¾ RE = CU B + D CB
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© Gustavo Indart Slide 7 Bank of Canada Bank of Canada Canada’s central bank Controls and regulates financial institutions and markets Responsible for monetary policy Relatively independent from central government
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© Gustavo Indart Slide 8 Functions of the Bank of Canada Functions of the Bank of Canada Banker to the commercial banks
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