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Saving is the supply of loanable funds while

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Unformatted text preview: used to make transactions. Money has three purposes: store of value, meaning that it transfers purchasing power from the present to the future, unit of account, meaning that it provides the terms in which prices and debt are quoted, and medium of exchange, meaning that it is what we use to buy goods and services. Money’s liquidity is the ease with which money is converted into goods and services. A barter economy requires the double coincidence of wants, meaning that two people each have a good that the other wants are the right time and place to make an exchange. Fiat money is money that has no intrinsic value. Commodity money is the opposite, it has intrinsic value. The most common example is gold. An economy is said to be on a gold standard if people use gold or gold- backed paper as money. Fiat money evolves from commodity money. As long as everyone continues to accept paper bills in exchange, they will have value and serve as money. Everyone values fiat money simply because they expect everyone else to value it. Money supply: the quantity of money available in an economy. The attempt to set a particular value for the money supply is called monetary policy, which is done by the central bank, the Bank of Canada. In Canada the target inflation rate is between 1 and 3 percent per year. Page 7 of 52 Jessica Gahtan Prof: Mokhles Hossain Macroeconomics ECON2000 Fall 2013 The Bank of Canada can control the money supply through open- market operations, the purchase and sale of government bonds (mostly short- term bonds called treasury bills). To increase money supply, the Bank of Canada buys government bonds from the public, increasing dollars in circulation. To decrease money supply, the Bank sells some government bonds. Measuring the money supply: one type of asset is currency, the sum of outstanding paper money and coins. A second type of asset is demand deposits, the funds people hold in chequing accounts. Demand deposits are added to currency when measuring quantity of money. B: Currency plus chartered bank deposits at the Bank of Canada M1: Sum of currency in circulation, demand deposit, and other chequing deposits at banks M2: Sum of M1 plus personal savings deposits and non...
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