All credit for this text goes to:
Ragan, C.T.S. Macroeconomics, 18th Canadian Edition. Pearson.
Study Session Meta (delete when complete)
LO Coverage & Mastery
LO Title Status Mastery Notes Section 1 Nature of money 🔶 Understood Functions ✅, Characteristics ✅, Evolution ✅, Gresham’s Law disambiguated from inflation ✅, MCQ drill ✅ LO 1 2 Canadian banking system 🔶 Understood Two-tier structure ✅, BoC three functions ✅, Commercial bank profit motive ✅, Reserve ratio calculation ✅, MCQ drill ✅ LO 2 3 Money creation by the banking system ✅ Mastered Deposit multiplier derived from first principles ✅, 1/v formula ✅, Leaks understood ✅, MCQ drill all ✅ LO 3 4 The money supply ✅ Mastered M1→M3 layering ✅, Demand vs notice deposits ✅, Near money vs money substitutes ✅, Kai’s insight anchored (narrow=exchange, broad=store of value) LO 4 Vocabulary Tracker
Term Tier Location Escalation Flag Medium of exchange T2 LO 1 Vocab — Store of value T2 LO 1 Vocab — Unit of account T2 LO 1 Vocab Most commonly forgotten of the three functions Double coincidence of wants T1 LO 1 Glossary — Debasing T1 LO 1 Glossary — Gresham’s Law T2 LO 1 Vocab Different mechanism from inflation — bad money drives out good at individual level Fractional reserve banking T2 LO 1/3 Vocab Prerequisite for LO 3 Fiat money T1 LO 1 Glossary — Central bank / Bank of Canada T2 LO 2 Vocab — Commercial bank / Chartered bank T2 LO 2 Vocab Same thing — “chartered” is Canadian legal term Target reserves / Target reserve ratio (v) T2 LO 2 Vocab Key input for LO 3 formula Excess reserves T2 LO 2 Vocab Drives profit-seeking lending behavior Deposit multiplier (1/v) T2 LO 3 Vocab Highest-leverage formula in Ch 11 Cash drain T1 LO 3 Glossary Leak that reduces multiplier M1, M1+, M2, M2+, M3 T2 LO 4 Vocab Progressive broadening from medium of exchange to store of value Demand deposit T2 LO 4 Vocab = chequing account Notice deposit T2 LO 4 Vocab = savings account Near money T1 LO 4 Glossary Convertible to money quickly Money substitutes T2 LO 4 Vocab Credit cards — NOT money Current Position
LO: Chapter 11 complete. All 4 LOs mastered or understood. Ready for Ch 12. Last Micro-Test: LO 4 — “As money supply definitions broaden, what function dominates?” Kai correctly identified store of value takes over as medium of exchange function weakens. Articulated from first principles (can’t exchange a notice deposit without notice). Last Lens Used: None this session
Parking Lot (Later LOs)
- Fractional reserve banking mechanism — flagged confusing/circular in margin notes (covered in LO 3)
- Demand vs notice deposits — couldn’t recall during pre-reading (covered in LO 4)
- Too many types of banks — disambiguation card needed (covered in LO 2)
- Securities as loans — partial confusion in margin notes (covered in LO 2)
Mastery Gaps (Review Before Exam)
From Lecture Transcript Review (2026-04-15)
- LO2: BoC balance sheet as tool map. Each asset/liability line maps to one of the three monetary policy tools. Government securities = OMA. Advances = benchmark rate. Commercial bank deposits = required reserves. Professor presents all three tools as one integrated picture, not separately. Needs drill: “Which balance sheet line does this tool change?”
- LO2: Real-world reserve ratio is tiny. Professor says “less than one hundredth of a percent” — real multipliers are 100x+, not 20x (textbook’s 5% example). Context for understanding why small BoC actions have massive effects.
- LO3: Stopping condition > round counting. “We absolutely do not care how many rounds it takes.” Process stops when total ΔReserves = initial injection. Formula 1/v falls out of this logic. Needs re-anchor if exam asks “what determines when the process stops.”
- LO3: Cash drain formula NOT on exam. Professor explicitly excluded ΔMS = ΔR/(c+v). Safe to skip.
From Study Session (2026-04-13)
- LO1: Unit of account is the most forgettable function. Kai initially named 2 of 3 (medium of exchange, store of value — missed unit of account). Anchor: prices on shelves in dollars = unit of account.
- LO1: Gresham’s Law vs inflation from debasing — mechanism confusion. Initially conflated. Gresham’s is individual behavior (hoard good coins, spend debased ones). Inflation from debasing is money supply effect (more coins → prices rise). Both happen together historically but are different mechanisms.
Session Log
Date LOs Covered Mastery Results Key Clarifications 2026-04-13 LO 1 🔄 In progress Three functions ✅, Six characteristics ✅ with Bitcoin application, Evolution taught, Gresham’s Law corrected LO 1 taught from scratch. Pre-reading margin notes used as agenda. Baseline was strong (Kai named 2 of 3 functions and divisibility from memory). Bitcoin scorecard was a good Apply test — Kai correctly identified “readily acceptable” as the failing characteristic, matching textbook’s position. Gresham’s Law was initially conflated with inflation — clear distinction drawn between individual behavior (Gresham) and money supply effects (inflation). 2026-04-13 LO 1 ✅, LO 2 🔶, LO 3 ✅ Mastered, LO 4 ✅ Mastered LO 1 MCQ drill all ✅. LO 2 two-tier system and reserve calculation ✅. LO 3 deposit multiplier derived from first principles — Kai independently predicted multiplier effect before being shown the math. All 3 MCQs correct. LO 4: Kai caught an error in Claude’s question (an M1-but-not-M2 item is logically impossible) — demonstrates real understanding of nesting. LO 2: Two-tier structure (BoC + commercial banks) landed. BoC’s three functions covered. Commercial banks as profit-seekers + reserve ratio calculation. MCQ tested the common trap (C — “BoC lends to commercial banks who lend to households” is backwards) — Kai self-corrected from C to B. Disambiguation card for bank types (central, commercial, chartered, near-banks) addressed pre-reading confusion. LO 3 (HIGHEST PRIORITY): Started from baseline question about money creation. Kai independently predicted the multiplier effect. Formula 1/v taught, table walkthrough, leak mechanisms (cash drain, excess reserves). All three mastery MCQs correct, including the trap (85% of deposits vs 85% of excess reserves). LO 4: M1-M3 nesting with Kai’s own insight as anchor (“narrow=exchange, broad=store of value”). Demand vs notice deposit disambiguation. Credit cards as money substitutes (not money). Kai caught a flawed question I wrote — M1-but-not-M2 is impossible given nesting.
LO 1: The Nature of Money
What does money do?
Money performs three functions. If something can't do at least the first two, it's not functioning as money.
- Medium of exchange — solves the “double coincidence of wants” problem. I don’t need to find someone who wants what I have AND has what I want. I just need someone who’ll accept money.
- Store of value — holds purchasing power over time. Earn today, spend next month.
- Unit of account — a common measuring stick for prices. Everything priced in dollars, not in “3 chickens = 1 loaf = ½ shirt.”
The function most commonly forgotten on an exam is unit of account. Anchor: prices on store shelves in dollars = unit of account. Savings account balance holding value = store of value. Using money to buy groceries = medium of exchange.
Hyperinflation breaks money's functions in sequence.
When inflation is extreme (Weimar Germany, Zimbabwe), money first fails as a store of value (your savings evaporate). Then it fails as a unit of account (prices change so fast they’re meaningless). Finally it fails as a medium of exchange (people switch to barter or foreign currency). This is why stable inflation matters — it’s what keeps money working as money.
What makes something a “good” money?
Six characteristics. A material works well as money if it has all six.
| Characteristic | What it means | Example of failure |
|---|---|---|
| Easily recognizable | Everyone can identify it as legitimate | Obscure foreign coins |
| Readily acceptable | People will take it in exchange | Bottle caps (nobody accepts) |
| High value-to-weight | Carryable | Cows (too heavy per unit value) |
| Divisible | Can break into smaller units | Gold bars (hard to make change) |
| Durable | Doesn’t degrade over time | Salt (dissolves), cows (die) |
| Difficult to counterfeit | Hard to fake | Beads (any bead looks the same) |
Bitcoin against the six characteristics:
Characteristic Bitcoin Easily recognizable Partial — approaching mainstream but not universal Readily acceptable Fails — most vendors won’t accept it High value-to-weight Passes (digital, weightless) Divisible Passes (to 8 decimal places) Durable Passes (decentralized ledger) Difficult to counterfeit Passes (blockchain cryptography) Conclusion: Bitcoin fails “readily acceptable” — the textbook’s reason for saying cryptocurrencies are not currently money in the traditional sense. They might function as a speculative store of value, but don’t work as a medium of exchange.
How did money evolve?
Five stages, each solving a problem with the previous stage.
- Barter — direct exchange. Fails at double coincidence of wants.
- Metallic money by weight — gold, silver. You had to weigh and assess purity every transaction.
- Coinage (stamped metal) — sovereign stamps guaranteed weight and purity. Two problems followed:
- Clipping — people shaved edges, kept shavings
- Debasing — rulers mixed cheaper metals, kept the difference
- Paper money (fractionally backed) — notes were claims on gold held in a vault. Banks issued more notes than they had gold. Fractional reserve banking begins here. Risk: bank runs.
- Fiat money — paper with no gold backing. Value from government decree + public confidence. What we use today.
Parallel evolution: deposit money — money existing only as bank account balances. Today, most of the money supply is deposit money, not physical notes.
Gresham’s Law — and why it’s different from inflation
Gresham's Law: "Bad money drives out good." When old (full-weight) coins and new (debased) coins circulate at the same face value, people hoard the good ones and spend the debased ones. Good money disappears from circulation.
Gresham's Law is NOT the same as "debasing causes inflation."
Mechanism What happens Level Gresham’s Law People hoard full-weight coins, spend debased ones Individual behavior Inflation from debasing More coins with same face value → money supply rises → prices rise Economy-wide Both happen together historically, but they’re different mechanisms. The exam can test either one separately.
Modern example of Gresham's Law: You have two twenties — one crisp, one torn. Both buy the same thing. You spend the torn one and keep the crisp one. Applied at scale, the "crisp" money disappears from circulation.
Key Vocabulary (LO 1)
Medium of exchange
Definition: Money’s role as the thing that facilitates transactions between buyers and sellers, eliminating the need for barter. Example: Paying for groceries with a debit card. The card accesses your deposit money, which the store accepts — no need for the store to want whatever you produce. Trap: Don’t confuse with “store of value.” Medium of exchange is about completing a transaction right now. Store of value is about preserving purchasing power over time. Connects to: double coincidence of wants, unit of account
Store of value
Definition: Money’s role as a way to hold purchasing power over time so earnings can be spent later. Example: $500 sitting in a savings account for a year. (Inflation erodes this — a key limitation.) Trap: Store of value is eroded by inflation. During hyperinflation, money fails at this function even while it still works as a medium of exchange. Connects to: inflation, hyperinflation, purchasing power
Unit of account
Definition: Money’s role as a common measuring stick for prices. All prices get quoted in the same units, eliminating the need for cross-comparisons. Example: A coffee costs 2,000, a house costs $600,000. All in dollars — directly comparable. Trap: Most commonly forgotten of the three functions. Often feels “too obvious” until the exam asks for all three. Connects to: medium of exchange, store of value
Gresham's Law
Definition: “Bad money drives out good.” When coins of different intrinsic value circulate at the same face value, people hoard the higher-value coins and spend the lower-value ones, so the higher-value coins disappear from circulation. Example: In ancient Rome, when emperors debased silver coins, people hoarded older full-silver coins and spent the newer debased ones. Within a generation, only debased coins circulated. Trap: Not the same as “debasing causes inflation.” Gresham’s is about individual behavior (which coins to spend). Inflation is about aggregate money supply. Both happen together historically but are different mechanisms. Connects to: debasing, metallic money, money supply
Glossary (LO 1)
Double coincidence of wants — The barter problem that money solves. In barter, you need to find someone who wants what you have AND has what you want. Money eliminates this by providing a universally accepted intermediary.
Debasing — Reducing the precious metal content of coins while keeping the face value the same. Historically done by rulers to generate revenue. Causes both Gresham’s Law (hoarding of older coins) and inflation (more coins chasing the same goods).
Fractional reserve banking — Banking system where banks hold only a fraction of deposits as reserves, lending out the rest. Origins in early paper money when banks issued more notes than gold held. Basis for modern money creation (covered in LO 3).
Fiat money — Money with no commodity backing. Value derives entirely from government decree (“let it be done”) and public confidence. All modern currencies.
Deposit money — Money existing as bank account balances rather than physical currency. Dominates the modern money supply.
LO 2: The Canadian Banking System
What are the two tiers of the banking system?
The Canadian banking system has two tiers. This is the anchor that resolves the "bank bank bank" confusion.
| Tier | Who | What they do |
|---|---|---|
| Tier 1 — Central bank | Bank of Canada (one entity, government-owned, not profit-seeking) | Manages the system, sets monetary policy |
| Tier 2 — Commercial banks | RBC, TD, Scotiabank, etc. (many, privately-owned, profit-seeking) | Take deposits, make loans |
Bank of Canada does NOT accept household deposits or lend to households. It's the bank that serves other banks and the government. Commercial banks serve you.
What are the three functions of the Bank of Canada?
- Banker to the commercial banks — commercial banks hold reserve accounts AT the Bank of Canada. Inter-bank settlement happens via these accounts.
- Banker to the federal government — the government holds its accounts at the Bank of Canada; Bank of Canada also manages federal debt issuance.
- Regulator of the money supply — Bank of Canada controls the amount of money in the economy via interest rates and open market operations. This is the big one, and Ch 12 builds on it.
The BoC Balance Sheet as a Map of the Three Monetary Policy Tools (from lecture)
Each line on the BoC balance sheet maps to one of the three monetary policy tools. The balance sheet IS the tool map.
Assets (what BoC owns):
| Line Item | Monetary Policy Tool | How It Works |
|---|---|---|
| Government of Canada securities (~$90B in Dec 2014) | Open market operations | BoC buys → money injected into economy (MS↑). BoC sells → money withdrawn (MS↓). |
| Advances to commercial banks ($0 in Dec 2014) | Benchmark interest rate | The rate BoC charges on these advances. Higher rate = costlier for banks to borrow = more cautious lending = less money creation. |
| Other assets (foreign currencies, gold) | — | Not a primary policy tool |
Liabilities (what BoC owes):
| Line Item | What It Represents |
|---|---|
| Notes in circulation (~$70B) | Physical money in the economy — the basis of M1 |
| Government of Canada deposits (~$21B) | Treasury — government’s bank account at BoC |
| Commercial bank deposits (~$150M) | Required reserves — this is the required reserve ratio tool in action |
The $0 in advances means the Canadian banking system was healthy. No commercial bank needed emergency loans from BoC. Compare: during a crisis, this number spikes as banks scramble for liquidity.
The 70B in notes shows how tiny the reserve cushion is. The required reserve ratio in Canada is much smaller than textbook examples — professor says “sometimes less than one hundredth of a percent.” Every 100+ in deposit money. The real-world multiplier is enormous.
How do commercial banks make money?
Commercial banks are profit-seekers. They take deposits at low interest rates and make loans at higher interest rates. The spread is their profit.
The single most important behavioral rule: A profit-seeking bank will not let excess reserves sit as idle cash. It will lend them out to earn interest. This one rule drives everything in LO 3.
What are reserves and the target reserve ratio?
| Term | Definition |
|---|---|
| Reserves | Cash in the vault + commercial bank’s deposits at the Bank of Canada |
| Target reserve ratio (v) | Fraction of deposits the bank chooses to hold as reserves (in Canada, banks choose their own — typically ~5%) |
| Target reserves | Target ratio × total deposits — the amount the bank aims to hold |
| Excess reserves | Reserves above the target amount |
Disambiguation: Too many types of banks
| Term | What it means |
|---|---|
| Central bank | Bank of Canada. One entity, government-owned, not profit-seeking |
| Commercial bank | Generic term for private banks (RBC, TD, etc.) |
| Chartered bank | Same as commercial bank — “chartered” is Canadian legal term (federally licensed under the Bank Act) |
| Near banks | Non-bank financial institutions doing bank-like things (credit unions, trust companies) |
When you see "bank" in the textbook, 95% of the time it means a chartered/commercial bank. Bank of Canada is usually explicitly named.
Key Vocabulary (LO 2)
Bank of Canada
Definition: Canada’s central bank. One entity, government-owned, not profit-seeking. Serves three functions: banker to commercial banks, banker to federal government, regulator of money supply. Example: When RBC owes TD money at end of day, the settlement happens via their accounts at the Bank of Canada. Trap: Bank of Canada does NOT accept household deposits or lend directly to households. That’s commercial banks’ job. Connects to: commercial banks, monetary policy, open market operations (Ch 12)
Target reserve ratio (v)
Definition: The fraction of deposits a commercial bank chooses to hold as reserves. In Canada, not legally required since 1994 — banks set their own, typically around 5%. Example: With v = 5% and 50, loanable amount = $950. Trap: Don’t confuse target reserves with excess reserves. Excess reserves are anything held above the target. Connects to: deposit multiplier (LO 3), excess reserves
Excess reserves
Definition: Reserves held by a commercial bank above its target reserve level. Profit-seeking banks always try to lend excess reserves out to earn interest. Example: Bank has 10,000, actual reserves held = 5,000 — bank will lend this out. Trap: Cash in the vault earns nothing. Loans earn interest. A bank holding excess reserves is leaving money on the table. Connects to: target reserves, deposit multiplier, money creation (LO 3)
Glossary (LO 2)
Chartered bank — A commercial bank federally licensed under the Bank Act. In Canada, “chartered” and “commercial” are used interchangeably.
Near banks — Non-bank financial institutions (credit unions, trust companies) that provide bank-like services but are not chartered banks.
Reserves — Cash in the vault plus the commercial bank’s deposits at the Bank of Canada. What the bank holds against potential withdrawals.
LO 3: Money Creation by the Banking System
This is the most important LO in Chapter 11. The banking system creates money by lending out deposits, which become new deposits, which enable further lending. The formula is simple but the mechanism needs to land in first principles.
How does the banking system create money?
Start with one key fact: Fractional reserve banking means banks hold only a small fraction of deposits as reserves (~5%) and lend out the rest (~95%). When a loan is made, the borrower spends the money, and it gets re-deposited somewhere — usually at another bank, sometimes at the same bank. That new deposit then enables further lending.
The chain (with 5% reserve ratio, starting with $1,000 new deposit):
| Round | Deposit | Reserves held (5%) | Loan made (95%) |
|---|---|---|---|
| 1 | $1,000 | $50 | $950 |
| 2 | $950 | $47.50 | $902.50 |
| 3 | $902.50 | $45.13 | $857.38 |
| 4 | $857.38 | $42.87 | $814.51 |
| … | … | … | … |
| Total | $20,000 | $1,000 | $19,000 |
Each round gets smaller. Eventually the rounds shrink to zero. The total deposits across all rounds = the total money supply created from the original deposit.
The stopping condition matters more than the rounds (from lecture).
Professor: “We absolutely do not care how many rounds it takes.”
When does deposit money creation stop? When the total change in reserves = the initial injection. If 100.
At that point, total new deposits = $100 / v = initial injection / reserve ratio. The formula falls out of the stopping condition logic — not from counting rounds.
What’s the formula?
Deposit multiplier = 1/v, where v = target reserve ratio.
Total money supply created = Initial deposit × (1/v)
Examples:
- v = 10%, initial deposit 500 × 10 = $5,000
- v = 8%, initial deposit 10,000 × 12.5 = $125,000
- v = 5%, initial deposit 1,000 × 20 = $20,000
Why does this feel circular but actually isn’t?
The same dollars get "re-counted" as they move, which feels like double-counting. But it's accurate: your 950 loan is ALSO money (the borrower can spend it). Deposits and loans are both money because they're both claims on real purchasing power.
The bank isn’t lending itself money. Each loan goes to a different borrower, who spends it, and a different party deposits it back into the system. The chain moves horizontally across the economy, not in a loop within one bank.
What are the leaks that reduce the multiplier?
Real-world money creation is less than 1/v because of two leaks:
| Leak | What it does |
|---|---|
| Cash drain | People hold some loan proceeds as physical cash (carry it in wallets) instead of re-depositing. That cash leaks out of the banking system and doesn’t multiply further. |
| Excess reserves | If banks hold more than the target ratio (cautious banks during crises), less gets lent out than the formula predicts. |
The 1/v formula gives the theoretical maximum. Actual money creation is always smaller.
How to: Money supply change from a new deposit
Use when: Question gives you (a) a new deposit entering the banking system and (b) a reserve ratio
Given: Initial deposit, target reserve ratio (v)
Step Result Formula/Action 1 Multiplier computed Deposit multiplier = 1/v 2 Total money supply computed Total = Initial deposit × (1/v) 3 New money created identified New money = Total - Initial deposit Sanity checks:
- Multiplier × initial deposit should be many times the original
- If v = 10%, multiplier = 10; if v = 5%, multiplier = 20; if v = 8%, multiplier = 12.5
Final answer looks like: A dollar amount several times larger than the initial deposit (typically 10× to 25×)
Watch for: Whether the question asks for total money supply OR new money created. “Total” includes the original deposit; “new money created” subtracts it.
Key Vocabulary (LO 3)
Deposit multiplier
Definition: The factor by which the money supply can expand from an initial deposit, given a target reserve ratio. Equals 1/v, where v is the target reserve ratio. Example: With v = 10%, the deposit multiplier is 10. A 5,000 in total money supply. Trap: The formula gives the theoretical maximum. Cash drain and excess reserves reduce real-world multiplier below 1/v. Connects to: fractional reserve banking, money creation, target reserve ratio
Fractional reserve banking
Definition: Banking system where banks hold only a fraction of deposits as reserves and lend out the rest. The foundation of modern money creation. Example: With v = 5%, banks hold 5% of deposits as reserves and lend out 95%. This lending becomes new deposits elsewhere, which enables further lending. Trap: Not an accounting trick. The system genuinely creates new money because deposits and loans are both forms of money. Connects to: deposit multiplier, money supply, reserve ratio
Glossary (LO 3)
Cash drain — The leak that occurs when people hold some loan proceeds as physical cash rather than re-depositing. Reduces the actual multiplier below 1/v.
LO 4: The Money Supply
Why are there multiple definitions of the money supply?
The Bank of Canada tracks multiple measures (M1, M1+, M2, M2+, M3) because "how much money exists?" depends on how strictly you define "money." Narrower measures emphasize medium of exchange; broader measures emphasize store of value.
What’s in each level?
| Measure | What’s included | Function emphasis |
|---|---|---|
| M1 | Currency in circulation + demand deposits at chartered banks | Pure medium of exchange |
| M1+ | M1 + chequable notice deposits at chartered banks + demand/notice deposits at near-banks | Still mostly medium of exchange |
| M2 | M1+ + non-chequable notice deposits + personal term deposits | Mixing in store of value |
| M2+ | M2 + deposits at other financial institutions | More store of value |
| M3 | M2+ + non-personal term deposits + foreign currency deposits | Broadest — heavy store of value |
Each level INCLUDES everything in the narrower levels. M2 contains all of M1+, which contains all of M1. So nothing can be "in M1 but not M2" — logically impossible.
Demand vs notice deposits
| Type | What it is | Example |
|---|---|---|
| Demand deposit | Account that can be withdrawn on demand, no notice required. Used for transactions. | Chequing account |
| Notice deposit | Account that technically requires notice before withdrawal. Earns interest. | Savings account |
In practice, banks usually waive the notice requirement on savings accounts, so the distinction has blurred. For the exam: demand = chequing, notice = savings.
Near money vs money substitutes
| Term | What it is | Counted in M? |
|---|---|---|
| Near money | Assets that aren’t used in transactions but can be quickly converted to money (savings deposits, term deposits) | Yes — in broader M measures |
| Money substitutes | Things used LIKE money in transactions but aren’t money (credit cards) | No — not counted at all |
Credit cards are NOT money. When you pay with a credit card, you're taking a short-term loan. The actual money moves from your bank account when you pay the credit card bill. Credit cards substitute for the act of using money in a transaction — they're a money substitute, not money itself.
Kai’s key insight
Narrow money = medium of exchange. Broad money = store of value.
As you move from M1 → M3, the items added are harder to spend directly but still hold value. M1 is what you’d use to buy groceries. M3 includes things that are locked up (term deposits, foreign currency) and function primarily as stores of value.
Key Vocabulary (LO 4)
M1
Definition: The narrowest measure of the money supply. Includes currency in circulation plus demand deposits at chartered banks. Emphasizes money’s medium-of-exchange function. Example: A 500 chequing account balance are both in M1. Trap: Savings accounts are NOT in M1 — they’re in M2. Credit cards are in no M measure at all. Connects to: demand deposits, medium of exchange
Demand deposit
Definition: An account that can be withdrawn on demand without notice. Used for day-to-day transactions. Example: Chequing accounts. Trap: Don’t confuse with notice deposits (savings accounts), which technically require notice before withdrawal and earn interest. Connects to: M1, notice deposits
Notice deposit
Definition: An account that technically requires notice before withdrawal. Earns interest. Less transaction-friendly than demand deposits. Example: Savings accounts. In practice, banks usually waive the notice requirement. Trap: Notice ≠ term. Notice deposits allow withdrawal with notice. Term deposits (GICs) are locked in for a fixed period. Connects to: M2, demand deposits, term deposits
Money substitutes
Definition: Things used LIKE money to complete transactions, but aren’t themselves money. Not counted in any M measure. Example: Credit cards. Using a credit card is taking a short-term loan — the actual money moves from your bank account when you pay the bill. Trap: Credit cards FEEL like money (you use them to pay for things), but they’re substitutes for money, not money itself. Connects to: near money, M1
Glossary (LO 4)
Near money — Assets not used directly for transactions but quickly convertible to money (savings deposits, term deposits). Counted in broader M measures (M2 and beyond).
Term deposit — A deposit locked in for a fixed period (e.g., GIC). Counted in M2 and broader measures.
Beyond the Textbook
Central banks as public good, commercial banks as profit-seekers. The textbook presents these as two types of institutions, but the real structural insight is that they serve different economic functions. Central banks provide the public-good services that markets undersupply (financial stability, inter-bank settlement, uniform monetary policy). Commercial banks operate under profit motives in a competitive market. This is why the system has two tiers — private firms can’t provide lender-of-last-resort services to themselves, and central banks shouldn’t compete with private banks for household deposits. The division of labor reflects the public-good vs private-good distinction from microeconomics.
The decentralized money debate. Kai’s pre-reading flagged cryptocurrency as a challenge to the central-bank model. The textbook’s position is pragmatic (central banks exist because these functions needed reliable institutional performers, and alternatives haven’t worked at scale). But the debate is live: decentralized systems argue that technology (blockchain) can replace institutional trust. The textbook’s framework gives you the test: does the decentralized system satisfy the three functions (medium of exchange, store of value, unit of account) AND the six characteristics AND provide stability? If not, it’s not a full substitute for central banking — yet.
Money creation is not magic, but it’s also not intuitive. The first time you see “banks create money,” it sounds like accounting fraud. But the mechanism is real and necessary — without fractional reserve banking, the economy would be starved for capital. Every loan is someone’s income; every deposit is someone’s savings; the multiplier is how aggregate savings fund aggregate investment. This connects directly to Chapter 10 LO 3 (NS/I graph) — the banking system is literally the market that matches savings to investment, and the deposit multiplier is how it scales.