ECN Chapter 10
The Meaning of Money
Money: The set of assets in an economy that people regularly use
to buy goods and services from other people.
- money and wealth are not the same
- Bill gates who owns most of Microsoft Corporation, is wealthy
but this asset is not considered a form of money.
The Functions of Money
Medium of exchange: An item that buyers give to sellers when
they want to purchase goods or services. Money is the medium of
exchange in the Canadian economy.
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 a unit of account.
Store of value: An item that people use to transfer purchasing
power from the present to the future. Example, when a seller
accepts money today in exchange for a good or service, the seller
can hold the money and become a buyer of another good or
service at another time.
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. Intrinsic value means that the item would
have value even if it were not used as money. Example gold: It has
intrinsic value because it is used in the industry and in the making
Flat Money: Money without intrinsic value that is used as money
because of government decree. Example: Canadian paper bills.
The government has decreed its dollars to be valid money.
Money In The Canadian Economy
Currency: The paper bills and coins in the hands of the public.
Demand deposits: Balances in the bank accounts that depositors
can access on demand by writing a cheque or using a debit card.
The Bank of Canada
Bank of Canada: The central bank of Canada. Central bank: An institution designed to regulate the
quantity of money in the economy.
The Bank of Canada Act
- The bank of Canada has related jobs. The first is to issue
- The second is to act as a banker to the commercial banks.
These deposits at the bank of Canada enable the commercial
banks to make payments to eachother.
- The third job is to act as a banker to the Canadian government.
The government of Canada has a demand deposit at the bank of
Canada and demand deposits at large commercial banks. The
bank of Canada manages the governements bank accounts, as
well as manages Canada’s foreign exchange reserves and
national debt on behalf of the government.
- The fourth and most importanat job is to control the quantity
of money that is made available to the economy, called money
Money Supply: The quantity of money available in the economy
Monetary Policy: The setting of the money supply by
policymakers in the central bank.
The Monetary Policy
The bank of Canada has the power to increase or decrease the
number of dollars in the economy. A simple good metaphor to
explain the monetary policy: Imagine the bank of Canada printing