Lecture # Chapter 10
The Monetary System
• An asset that is regularly used to buy goods and services
• Money has 3 functions
o Medium of Exchange, use it to buy goods and services
o Unit of account, most prices in the economy are measured by money(Canadian
o Store of value (asset)
• Credit Card is not a medium of exchange; it is a method of deferring payment.
• The ease with which an asset can be converted into the economy’s medium of exchange
• When prices of rise, the value of money falls.
Commodity Vs. Fiat money
• Commodity money: Money that takes the form of commodity with intrinsic value.
• Intrinsic value refers to that the item has value even if not used as money.
• Fiat money: Established as money by government decree, with no intrinsic value.
• Fiat money has value not because it is stamped by the government, but because people
accept it as a medium of exchange. In other words, people think it has value.
Money in the Canadian Economy
M = C + D
• C = Currency: Paper bills and coins in the hands of the public. (circulating, not in the
bank vault) • D = Demand Deposit: Checking account. The balances in bank account that depositors
can access on demand by using a cheque or using a debit card
• Canadian currency is about 46 billion dollars and demand deposit is in the form of
• Average currency holding for Canadians is $1800 per adult.
• Canadian Dollars are not backed by a gold standard.
Fractional Reserve Banking
• Abanking system in which the bank holds only a fraction of the depositors’money as
• Reserve ratio is the fraction of the total deposits that a bank holds as reserves.
Money Creation using T-Accounts
• Assets must EQUAL to liabilities
• For Banks, Reserves and loans assets and Deposits are liabilities
• The amount of deposits the whole banking system generates with each dollar of reserves
o Money Multiplier = 1/Reserve ratio
Bank of Canada
Canada’s central bank established in 1935
• The Bank of England is the oldest bank which still exists.
• The Bank of Canada has four main