1. Copyright (c) 2006 McGraw-Hill Ryerson Limited

2. Chapter 2: Learning Objectives
Functions and Efficiency of Money: from Barter to Monetary Exchange
How should we Define Money? Canadian measures
Monetary Standards & Systems: Types and Historical Experiences
Consequence of Fiat Money: The Costs of Inflation
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3. Barter
A method of exchange by which goods or services are directly exchanged for other goods or services without using a medium of exchange, such as money
Double coincidence
Equal values of goods and services
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4. Store of value and a standard of deferred payment
The Functions of Money
Medium of Exchange
How transactions are conducted
Medium of account
How the value of goods & services are denominated
Store of value and a standard of deferred payment
How the value of goods & services are maintained in monetary terms
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5. Monetary Standards Commodity money Fiat money
Gold, Silver, and Bimetallic standards
Gresham’s Law
Fiat money
Paper money standard
Canada’s early paper money history
The introduction of central banking
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6. The Measurement of Money
Taking an Empirical approach
Institutional aspects:
chartered vs. other types of financial institutions
types of deposits and their evolution: the growth of electronic transactions (Table 2.1)
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7. Chartered Institutions
A financial institution whose primary roles are to accept and safeguard monetary deposits from individuals and organizations, and to lend money out. 
A chartered bank in operation has obtained government permission on some level to do business in the banking sector
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8. Chartered banks provide the core financial intermediary services: individuals can easily deposit their funds into various types of accounts within a chartered bank, earning interest on their temporary savings
Chartered banks maintain a float of currency so they can process customers' daily transactions, but they lend out the majority of their deposits to individuals and commercial borrowers in an effort to stimulate economic growth
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9. The five largest banks in Canada
Royal Bank of Canada
Toronto Dominion Bank
Bank of Nova Scotia
Bank of Montreal
Canadian Imperial Bank of Commerce
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10. Transactions Data
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11. The Measurement of Money
Taking an Empirical approach
Institutional aspects:
chartered vs. other types of financial institutions
types of deposits and their evolution: the growth of electronic transactions (Table 2.1)
monetary aggregates: definitions and data
Table 2.2 & Figure 2.1
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12. The Canadian Money Supply: Key Measures, August 2004 TABLE 2.2
M1: Cash and demand deposits
$162,368
M2: M1& savings deposits
$623,318
M3: M2 & term deposits
$868,017
M2+: M2 & other deposit-taking institutions
$872,466
M2++: M2+ & MMMF and CSBs
$1,262,935
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13. Major Canadian Money Supply Aggregates
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14. Problem 1 Page 30 What are M1, M2, M2+, and M3 ?
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15. Currency in Circulation: Seasonally adjusted or unadjusted
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16. The Measurement of Money
Taking an Empirical approach
Institutional aspects:
chartered vs. other types of financial institutions
types of deposits and their evolution: the growth of electronic transactions (Table 2.1)
types of financial assets
seasonal adjustment (Figure 2.2)
Other refinements
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17. Asset class Instrument type
Securities
Other cash
Debt (Long-term)
Bonds
Loans
Debt (Short-term)
Bills (T-bills, Commercial Paper….)
Certificate of Deposits (CDs)
Equity
Stock
Foreign Exchange
Spot Foreign Exchange
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18. Bonds
A certificate of long-term debt issued by a public entity or a corporation
Issued at par value
Coupon rate
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19. Underwriter
An investment dealer who helps governments and corporations to raise capital by buying new shares and resell them to investors
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20. Stock States of ownership
The stock of a business is divided into multiple shares
A share has a certain declared face value, commonly known as the par value of a share
Common stock and preferred stock.
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21. Inflation Versus Deflation
There are 2 types of inflation/deflation:
Anticipated: there are NO surprise changes in prices
Unanticipated: SOME price changes are NOT expected
Most inflations/deflations are NOT FULLY anticipated
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22. Creditor vs. lenders: real interest rate effect
The Costs of Inflation
Creditor vs. lenders: real interest rate effect
Seigniorage: the profit from printing money
“Shoe-leather” costs: frequent need for more cash
Tax implications: paying tax on inflation
“Menu” costs: cost of frequent price changes
Accounting problems: historical vs current costs
Inflation level and volatility: positively related
Inflation and Economic growth: negatively related
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23. What’s Special About Deflation?
When prices fall the REAL value of debt rises
Debtors are penalized; borrowers benefit
When prices fall EXPECTATIONS of additional reductions are possible
Consumers postpone purchases with further negative economic implications
If monetary policy responds by lowering interest rates they could fall to zero
At zero (nominal) interest rates cannot become negative
This is called the “zero lower bound”
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24. Summary Monetary systems are more efficient than barter systems
Money has 3 functions
medium of exchange
medium of account
store of value
Canadian definitions of the money supply include M1, M2, M2+, M3
Excessive monetary expansion leads to inflation which is socially costly
Deflation is the opposite of inflation and can produce serious negative economic consequences
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