C.3 What is Money?

Question 1

Currency

Answer 1

Paper money and coins

Question 2

Wealth

Answer 2

The total collection of pieces of property that serve to store value

Question 3

Income

Answer 3

A flow of earnings per unit of time

Question 4

Money

Answer 4

It is a stock: a certain amount at a given time.

Refers to anything generally accepted in payment for goods/services or in the repayment of debts

Question 5

Primary functions of money

Answer 5

1) Medium of exchange
2) A unit of account
3) As a store of value

Question 6

Medium of exchange

Answer 6

Money in the form of currency or cheques

Question 7

Transaction cost

Answer 7

Time spent trying to exchange goods or services

Question 8

Double coincidence of wants

Answer 8

In barter economies, double coincidence of wants is trying to find someone who has a good/service they want and also wants the good/service they have to offer

Question 9

Criteria for a commodity to function as money

Answer 9

1) Easily standardized
2) Widely accepted
3) Divisible
4) Easy to carry
5) Cannot deteriorate quickly

Question 10

Unit of account

Answer 10

Measure value in an economy

Question 11

How does unit of account reduce transaction costs

Answer 11

Reduces the number of prices to be considered by valuing everything in terms of a single measurement

Question 12

Store of value

Answer 12

Save purchasing power from the time income is received to the time it is spent

Question 13

Examples of store of value

Answer 13

Money, but also any asset like stocks, bonds, land, art, jewellery

Question 14

Without unit of account, what is the formula for determining how many prices you’d need when we have N goods

Answer 14

[N(N-1)]/2

Question 15

Liquidity

Answer 15

The relative speed and ease an asset can be converted into a medium of exchange

Question 16

Why do people hold money if other stores of value return higher purchasing power over time with things like interest

Answer 16

It is the most liquid asset

Question 17

Hyperinflation

Answer 17

Inflation rate exceeds 50% per month

Question 18

What determines the effectiveness of a store of value

Answer 18

Price level (think inflation)

Question 19

Payments system

Answer 19

The method of conducting transactions in the economy

Question 20

Commodity money

Answer 20

Money made up of precious metals or another valuable commodity

Question 21

Fiat money

Answer 21

Paper currency decreed by governments as legal tender

Question 22

Advantages of cheques

Answer 22

• Transactions without needing to carry large amounts of currency
• Reduces transportation costs associated with payments systems which improves economic efficiency

Question 23

Disadvantages of cheques

Answer 23

• Takes time for cheques to travel

- Funds withdrawn from a chequing account take several days before the bank allows the funds to be released

Question 24

E-money

Answer 24

Money that exists only in electronic form. E.g. first example was the debit card

Question 25

Store valued card

Answer 25

Simple form is a card purchased for a prepaid amount

Question 26

Smart card

Answer 26

Sophisticated store valued card that allows it to be loaded with digital cash from the owner's bank account whenever needed

Question 27

E-cash

Answer 27

Used online to purchase goods/services by setting up, with their bank, transfers of e-cash to their PC

Question 28

Money aggregates

Answer 28

Different measures of the money supply

Question 29

Narrowest measure of monetary aggregate + its components

Answer 29

M1+ 1. Currency: all fiat money in circulation (i.e. not held by gov't or banks) 2. Value of all chequable deposits at chartered banks, trust and mortgage loans companies, and credit unions. All extremely liquid

Question 30

M1++ components

Answer 30

Same as M1+ plus all nonceqable deposits at chartered banks, TMLs, and CUCPs

Question 31

M2 components

Answer 31

- Currency - Personal deposits at chartered banks - Non-personal demand and notice deposits at chartered banks - Fixed term deposits

Question 32

M2+ components

Answer 32

- Everything in M2; plus - Deposits at TMLs and CUCPs - Life insurance company individual annuities - Personal deposits at government owned saving institutions - Money market mutual funds

Question 33

Broadest definition of money supply and its components

Answer 33

M2++ - Everything in M2+; plus - Canada Savings Bonds and other retail debt instruments - Non-money market mutual funds

Question 34

M3

Answer 34

- Everything in M2; plus - Non-personal term deposits at chartered banks - Foreign currency deposits of residents at chartered banks

Question 35

What do M2 and M3 not include

Answer 35

Deposits with trust and mortgage loan companies and credit unions/caisse populaires

Question 36

Which is the true measure of money

Answer 36

We do not know. Just hope they move together

Question 37

How are monetary aggregates calculated

Answer 37

Monetary components are assigned constant and equal weight for a simple-sum indices M = x1 + x2 + ... + xn where, xi is one of the n monetary components of the monetary aggregate M

Question 38

What are the assumptions of the index M

Answer 38

- All monetary components contribute equally to the money total - All components are dollar-for-dollar perfect substitutes