Money

Money is any object generally accepted by people as payment for goods and services. For something to function as money, it must have four characteristics and serve three functions.

How It Appears Per Course

ADMN 201

Four Characteristics of Money

• Portable — easy to carry and transfer between people
• Divisible — can be broken into smaller units (cents, dollars)
• Durable — holds up over time without degrading
• Stable — maintains a predictable value so people trust it

Three Functions of Money

1. Medium of exchange — universally accepted to buy goods and services, eliminating the need for barter
2. Store of value — holds purchasing power over time for future use (unlike, say, a cow that could die)
3. Unit of account — provides a common measure of value for pricing goods, paying wages, and comparing worth

Canada’s Money Supply

Measure	What It Includes
M-1	Only the most liquid forms: currency (paper + coins) and demand deposits (chequing accounts)
M-2	Everything in M-1 plus savings deposits, time deposits, and money market mutual funds

• As of March 2021, M-1 totalled $1.46 trillion in Canada
• Currency is paper money and coins issued by the government; legally required as payment for debts
• Demand deposits (chequing accounts) are in M-1 because funds can be withdrawn at any time without notice
• Time deposits require prior notice to withdraw and cannot be transferred by cheque
• Money market mutual funds pool assets from many investors to buy short-term, low-risk securities

Credit Cards vs. Debit Cards

• Credit cards are NOT money — they create debt rather than transferring existing money; they are a temporary medium of exchange but not a store of value. Not counted in M-1 or M-2.
• Debit cards ARE in M-1 — they immediately transfer funds from a chequing account, the same as writing a cheque

The value of money depends on its supply. When the money supply is high, the value of money drops; when it is low, the value rises.

Cross-Course Connections

BankOfCanada — controls the money supply through monetary policy
CharteredBanks — chartered banks create money through the deposit expansion process
EconomicIndicators — inflation is driven by growth in the money supply
InternationalBankingAndFinance — exchange rates reflect relative currency values across countries
ShortTermFinancing — demand deposits and commercial paper are short-term financial instruments

Key Points for Exam/Study

• Know all 4 characteristics AND all 3 functions — both are commonly tested
• M-1 = currency + demand deposits (most liquid); M-2 = M-1 + savings + time deposits + money market funds
• Credit cards are a money substitute, not money — they are not included in M-1 or M-2
• Debit card transactions ARE included in M-1 (same effect as a cheque)
• The value of money is inversely related to its supply

Open Questions

• How does cryptocurrency (Bitcoin) fit within or outside the M-1/M-2 framework?

mindmap
  root((Money))
    Characteristics
      Portable
      Divisible
      Durable
      Stable
    Functions
      Medium of Exchange
      Store of Value
      Unit of Account
    Money Supply
      M-1
        Currency
        Demand Deposits
      M-2
        M-1
        Savings Deposits
        Time Deposits
        Money Market Funds