ECN 204 Lecture Notes - Fractional-Reserve Banking, Reserve Requirement, Demand Deposit
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Chapter 10: The Monetary System
-If there were no money, people would have to depend on barter which is the exchange of one
good/service for another good/service. It requires the double coincidence of wants, the unlikely
occurrence that two people each have a good or service that the other wants.
-With money, trading is easier because it is a standard form
Money: the set of assets in an economy that people regularly use to buy goods and services from other
people (money = wealth)
Three Functions of Money
1) A Medium of Exchange: an item that buyers give to sellers when they wants to purchase goods
2) Unit of Account: the yardstick people use to post prices and record debts. When we want to
measure and record economic value, we use money as the unit of account
3) Store of Value: an item that people can use to transfer purchasing power from the present to
the future. The value in which it can be hold, money fluctuates but the prices of houses may
hold more value in the future. Wealth is used to refer to the total of all store of value.
Liquidity: the ease with which an asset can be converted into the economy’s medium of exchange
The Kinds of Money
Commodity Money: money that takes the form of a commodity with intrinsic value (item would have
value even if it were not used as money). Example would be gold, cigarettes
Fiat Money: money without intrinsic value that is used as money because of government decree. The
paper money in your wallet has been decreed by the Canadian government to be valid money.
Money in the Canadian Economy
Money Stock: the quantity of money circulating in the economy has a powerful influence on many
If you were to Measure Money:
Currency: the paper bills and coins in the hands of the public
Demand Deposits: balances in bank accounts that depositors can access on demand by writing a cheque
or using a debit card
The Bank of Canada
Bank of Canada: central bank of Canada
Central Bank: an institution designed to regulate the quantity of money in the economy
The Bank of Canada Act
-in 1934, Parliament enacted the Bank of Canada Act, the bank was established in 19354 and
nationalized in 1938, therefore it is owned by the Canadian government
-Bank of Canada is managed by a board of directors composed of the governor, the senior deputy
governor, and 12 directors including the deputy minister of Finance.
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