P. 33. Monetary theory. Money and Prices, p. 473.

Credit creation is the re-depositing of lent money.

Money - anything which is readily acceptable in settlement of a debt.

Functions of money

1. Medium of exchange (for barter there must be double coincidence).

2. Unit of account

3. Store of value

4. Standard of defered payment

Attributes of money

1. Acceptability

2. Durability

3. Homogeneity

4. Divisibility into smaller

5. Portability (transporting)

6. Stability of value

7. Difficult to fake

Measuring money supply

1. Narrow money (Mo M2) - for medium of exchange function.

a. Mo (monetary base)-notes & coins in circulation + commercial banks cash deposits in the Bank.

b. M2 - Mo + non interest-bearing (current) accounts + interest bearing retail deposits (readily available) in banks and building societies.

2. Broad money (M4) for store of value.

a. M4 - cash + all deposits + CD + building society shares (ex. foreign currency deposits)

b. M5 - M4 + private holdings of treasury bill & other money market instruments.

Legal tender - money isz (everybody must accept), but not bank deposits.

Quasi money - postal orders etc.

Quantity equation of money - MxV=PxY. Quantity is determined by velocity+amount.

1. The index of retail prices (RPI) (13.1.87). Excludes >2.5 the average. Problems:

1. Time factor

2. High rates of inflation will distort

3. Quality changes

4. Taxes and benefits

5. Minorities

6. Political implications

2. CED - consumers' expenditure deflator, by product of nat. income accounts. Compares the expenditure of the whole of the population. Excludes government.