ECN 204 CH10.docx

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22 Oct 2012

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What Money is and Why It’s Important
- Without money, trade would require barter, exchange of one g & s for another
- Require a double coincidence of wants unlikely occurrence that two people each have a good
other wants
- Most people would have to spend time searching for other to trade with a huge waste of
- Searching is unnecessary with money, set of assets that people regularly use to buy g & s from
other people
3 Functions of Money
- Medium of exchange: an item buyers give to sellers when they want to purchase g & s
- Unit of account: yardstick people use to post prices and record debts
- Store of value: item people use to transfer purchasing power from present to future
2 Kinds of Money
- Commodity money: takes form of a commodity with intrinsic value (Example; gold coins,
cigarettes in POW camps)
- Fiat money: money without intrinsic value, used as money because of government decree
(Example: Canadian dollar)
Money in Canadian Economy
- Money supply (money stock): quantity of money available in economy
- What should be money?
Currency: paper bills coins in the hands of general public
Demand deposits: balances in bank accounts that depositors can access on demand by
writing a cheque or using debit card
Money supply = Currency + Deposits
Two measures of Money stock for Canadian economy
- M1+ : Chequable deposits, Currency
- M2: M1+ (chequable deposits, currency), Nonpersonal demand and notice deposits, few minor
Bank of Canada
- Central bank: institution designed to regulate money supply in the economy
- Bank of Canada: central bank of Canada
- Established in 1935
- Nationalized in 1938
- Structure of Bank of Canada:
Managed by board of directors, composed of governor, senior deputy governor, and 12
- All members of board of directors are appointed by minister of Finance, with 7-year terms for
the governor and senior deputy governor, and 3-year terms for the other directors
- Four Primary Functions of Bank of Canada
Issue currency
Act as banker to the commercial banks
Act as banker to the Canadian Government
Control the money supply
- Controlling money supply
Money supply is the quantity of money available in the economy
Money supply = Currency + Deposits
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