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 of jewelry.
• 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 currency.
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 supply
• 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 up $20 bills