Posts Tagged ‘Amount Of Money’
Thursday, November 25th, 2010
The demand for money. The quantity theory assumes that the demand for money changes directly and in strict proportion to the level of national income – an assumption that is not unreasonable if the transactions demand is the only source of the desire to hold money balances.
To express this assumption in symbolic terms, let 
stand for the demand for money, let Y stand for real national income, and let P stand for the average price at which goods and services are sold in the markets of the economy. Then we can write the assumed relationship as
where k is a constant showing desired money balances as a fraction of the value of annual national income. If firms and households hold money balances equal to the value of two weeks’ sales and purchases, k would be 1/26 and the demand for money could be expressed as 
The supply of money. For the moment we shall assume that the overall quantity of money, which we designate by M, can be set at any amount desired by the Bank of Canada operating in its capacity as the nation’s central bank. Within broad limits, as we have seen, the privately owned banks can exercise considerable control over the money supply. The limits themselves are determined by the central bank, which has the ultimate power to control major changes in the supply of money.
The demand for money and aggregate demand. The link between money and aggregate demand for commodities is provided in the classical quantity theory by the assumption that when firms and households do not hold the amount of money that they would like to hold, they try to alter their money holdings by altering their expenditures on commodities. If they have more money than they wish to hold, they raise their expenditures on commodities. If they have more money than they wish to hold, they raise their expenditures above their receipts so as to spend their unwanted money balances. This raises aggregate demand. If they have less money than they wish to hold, they cut their spending below their receipts so as to increase their holdings. This lowers aggregate demand.
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Tags: Aggregate Demand, Amount Of Money, Assumption, Assumptions, Bank Of Canada, Commodities, Expenditures, Fraction, Households, Money Balances, Money Changes, Money Holdings, Money Supply, Proportion, Quantity Theory, Receipts, S Central, Symbolic Terms, Theory Assumes That, Ultimate Power
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Wednesday, November 17th, 2010
The opportunity cost of holding each dollar of money balances is the rate of interest that could have been earned if the money balances is the rate of interest that could have been earned if the money had been used to purchase bonds.
Clearly, then, money will be held only if it provides services to the holders that are at least as valuable as the opportunity cost of holding it. The total amount of money balances that everyone wishes to hold for all purposes is called the demand for money.
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Tags: Amount Of Money, bonds, Demand For Money, Dollar, Mainstay Hotels, Money Balances, Money Opportunity, Money Rate, Nature, Opportunity Cost, Rate Of Interest, Winnipeg Manitoba
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Sunday, March 7th, 2010
Another way to raise the funds for federal budget deficits is to create new money (the popular term is print money) for the government to spend. While a growing economy requires a larger volume of money in circulation (called the “money supply” by economists), it is dangerous to increase the money supply too quickly. The inevitable result of such a policy would be severe inflation, as the excessive amount of money in circulation forces prices up rapidly. Thus, while it may be tempting for the government to simply “print money” to finance its budget deficits, this should be done only within limits, so as to avoid increasing the money supply by more than the economy can absorb without rapid inflation.
*The government does not actually physically print new money for itself to spend. The process is more subtle than that, and will be examined in detail. However, the economic effects of such a policy are such that it can reasonably be described as “printing money.”
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Tags: Amount Of Money, Auto Finance, Circulation, Economic Effects, Economists, Economy, Federal Budget Deficits, finance, forex, Government Money, Inevitable Result, Inflation, Money Supply, New Money, Print Money, Printing Money
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Thursday, February 4th, 2010
While it is true that the net federal government debt rose from about $3 billion in 1939 to over $22 billion by 1975. In practice, it is common for budget deficits to be financed by a combination of borrowing and “printing,” a practice that can be economically beneficial as long as the “printing” of money is kept within reasonable limits.
Part B: The National Debt
We have seen that the use of government fiscal policy to stimulate the economy during recessions requires that the government borrow money (mostly through bond issues) in order to finance its budget deficits. The total amount of federal government debt thus incurred – the amount of money owed by the federal government – is called the “National Debt.” By 1983 the National Debt will amount to over $100 billion, or nearly $4000 for every man, woman, and child in Canada.
The National Debt has, over the years, been the subject of a great deal of misunderstandings, fears, myths and political hypocrisy. Many Canadians believe, for instance, that the National Debt is owed to other countries and that Canada may go bankrupt because of it. Both of these are myths. On the other hand, few Canadians appreciate the real dangers concerning the National Debt. We will examine first the myths, then the real dangers.
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Tags: Amount Of Money, Auto Finance, Bond Issues, Borrow Money, Budget Deficits, Canadians, Economy, Edmonton, Fears, Federal Government Debt, Fiscal Policy, Government Money, Hypocrisy, Keynesian Policies, Man Woman And Child, Misunderstandings, Money Owed, Myths, National Debt, Printing Money, Recessions, Woman And Child
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Thursday, December 24th, 2009
By steadily eroding the value of the dollar, inflation will, over long periods of time, drastically reduce the purchasing power of the dollar, and thus seriously affect long-term financial planning. One example of this problem is pensions, which are discussed above. Another is life insurance planning. The essence of life insurance is to provide a sufficient amount of money to be invested to provide the survivor (say, widow) with enough investment income to live reasonably well. Suppose that a widow, age 32, invests the $200,000 of her husband’s life insurance benefits so as to earn $20,000 per years of interest income. While this may seem quite comfortable, inflation of 9 percent per year will reduce its purchasing power to $10,000 by the time she is 40, $5,000 when she is 48, and $2,500 at age 56 – one-eighth of its original value.
What can be done about this? By planning for far greater pensions and life insurance, this effect can be offset – but few people can afford to put aside that much out of today’s income for tomorrow. Consequently, most people cannot protect themselves against this problem, and remain very vulnerable to inflation over the long term. By eroding the purchasing power of money, inflation undermines the role of money as a store of value, making it difficult to plan for the future and to provide for protection against future financial risks. Rather, inflation encourages short-term thinking: “Spend, don’t save, and let the future take care of itself.”
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Tags: Amount Of Money, Auto Finance, Essence Of Life, Financial Planning, Furnace Company, Inflation, Insurance, Insurance Planning, Interest Income, Investment Income, Life Concerns, Life Insurance Benefits, Long Periods Of Time, Pensions, Power Of The Dollar, Purchasing Power Of Money, Survivor, Widow Age, Winnipeg
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Friday, December 4th, 2009
But there is the danger that when the banker decides to sell his securities the prevailing market price will be unfavorable, and that he will be obliged to accept a price lower than the one he himself paid for them. The fact is that the market price of bonds shifts about constantly, in accordance with shifts of supply and demand. The face value of a bond, the amount which the bondholder is to receive on its maturity, never changes, but he will only receive that sum at the time specified as the redemption date. If he wishes to sell the bond before then, he must sell it in the market for whatever price investors are prepared to pay. That price will reflect the prevailing demand and supply situation, and may be substantially above or below the bond’s face value.
In the case of bonds which are due to be redeemed in the near future, the divergence between market price and face value is unlikely to be large. Very soon the bondholder will receive the face value, and he would be unwilling to sell now for very much less. In the case of bonds which are due for redemption only in the distant future, however, the divergence between market price and face value may be very great. There is no assurance that the holder will soon receive a specified amount of money for the bond; for a long time to come its market price will be determined by the vagaries of demand and supply.
To avoid the possibility of having to sell securities at a heavy loss, banks prefer to hold those which will mature within a year or two. Because of the proximity of their redemption dates, the prices of such bonds cannot diverge too greatly from their respective face values. The banks, therefore, generally prefer to purchase short term bonds, or long term bonds which were issued a long time before, and are therefore due to mature in the near future. Canadian banks also purchase large quantities of federal government Treasury Bills, most of which have a maturity period of only 91 days.
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Tags: Amount Of Money, Bondholder, Canadian Banks, Demand And Supply, Distant Future, Divergence, Face Value, Face Values, Federal Government, Long Time, Maturity Period, Preference, Proximity, Quantities, Redemption, Supply And Demand, Supply Situation, Term Bonds, Treasury Bills, Vagaries
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