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
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
How the value of goods & services are maintained in
monetary terms
Monetary Standards

Commodity 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
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

The details: Table 2.2 & Figure 2.1
The Canadian Money Supply: Key Measures,
December 2001
M1: Cash and demand
$127,510
deposits
M2: M1& savings deposits
$529,436
M3: M2 & term deposits
$718,518
M2+: M2 & deposits @
$768,806
other deposit-taking
institutions
M2++: M2+ & MMMF and
CSBs
$1,123,062
Major Canadian Money Supply Aggregates
1200000
M2++
Millions of dollars
1000000
800000
M2+
600000
400000
M1++
200000
M1+
M1
0
80
82
84
86
88
90
Year
92
94
96
98
Currency in Circulation: Seasonally adjusted
or unadjusted
35000
Millions of dollars
30000
25000
20000
seasonally unadjusted
seasonally adjusted
15000
10000
5000
80
82
84
86
88
90
92
94
96
98
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

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
