Ch 12

Medium of exchange
Store of value
Unit of account
 Monetary Base (outside money): currency
in circulation plus bank reserves (reserves
essentially zero in Canada)
M1: currency in circulation plus
transactions deposits at some financial
institutions.
M2: M1 + savings deposits at some
financial institutions.
Inflation and the Fisher equation

P' P
i
P

1 R
1 r
1 i
 Type of cash-in-advance model.
Representative consumer, representative firm,
banks, and government.
Consumers and firms require cash on hand to
purchase goods, or can use credit cards, which
involves obtaining credit from the bank.
The quantity of credit card balances is
determined by the supply (from banks) and the
demand (consumers and firms).
 past
Present

Past period where all

Money is made.
The consumers decide how much
Money to hold BEFORE entering the next period-thus CASH-IN-ADVANCE
 past
Present

NO MONEY is recived until the end of the present period when all settlements are made.
 Money demand

M d PL(Y , R)
 Increasing in real income more currency
required as volume of transactions
increases.
Decreasing in the nominal interest rate.
The nominal interest rate is the opportunity
cost of using currency in transactions
higher R implies greater use of credit in
transactions, and less use of currency.
 Substitute using the approximate Fisher
relation.
M PL(Y , r i)
d

For our experiments, suppose inflation

rate is zero (harmless).
M d PL(Y , r )
Increase in Y
Sources of Shifts in the Demand for
Money

New information technologies.

Changes in financial regulations.
A change in the perceived riskiness of
banks.
Changes in the hour-to-hour, day-to-day,
and week-to-week circumstances in the
banking system.

Copyright 2013 13
Pearson Canada Inc.
Complete model