Ch14 — Money & Banking — Lesson & Tracker
Progress Tracker
| Concept | Attempts | Correct | Last Tested | Status |
|---|---|---|---|---|
| Money | 1 | 1 | 2026-04-17 | 🟢 |
| BankOfCanada | 2 | 1 | 2026-04-18 | 🟢 |
Your Weak Points
| Gap | History | Status |
|---|---|---|
| ”Bank rate” as the specific BoC tool | Said “raises rates” without naming it | Resolved ✅ |
| Full transmission chain | Described endpoint without intermediate steps | Resolved ✅ — but must be automatic |
| Expansionary vs. Restrictive both directions | Only drilled restrictive | Active gap — see both directions below |
| Open market operations (second tool) | Never tested | Active gap |
Concept Map — Weak → Strong Connections
graph TD MONEY["✅ Money — 3 Functions<br/>Medium of Exchange<br/>Store of Value · Unit of Account"] --> BOC["Bank of Canada<br/>Controls money supply"] BOC --> BR["⚠️ Bank Rate — Tool 1<br/>Rate charged to chartered banks"] BOC --> OMO["⚠️ Open Market Operations — Tool 2<br/>Buy or sell government securities"] BR -->|"Raise = Restrictive<br/>Lower = Expansionary"| CHAIN["⚠️ Transmission Chain<br/>BoC rate → bank lending rates<br/>→ borrowing → spending → prices"] OMO -->|"Sell = Restrictive<br/>Buy = Expansionary"| CHAIN
Bank of Canada — Lesson
Source: BankOfCanada
What the Bank of Canada Is (and Isn’t)
- Canada’s central bank — formed 1935
- Does not take public deposits or make personal loans (not a commercial bank)
- Manages the economy by controlling the money supply
- Governed by a governor, deputy governor, and 12 regional directors
The Two Policy Tools
The Bank of Canada has two tools, not one. Most people only know the bank rate. Know both cold.
| Tool | Expansionary (stimulate economy) | Restrictive (cool inflation) |
|---|---|---|
| Bank Rate | Lower the bank rate → chartered banks borrow more cheaply → more loans issued | Raise the bank rate → chartered banks’ costs rise → fewer loans, higher consumer rates |
| Open Market Operations | Buy government securities → injects money into bank reserves → more lending capacity | Sell government securities → pulls money out of bank reserves → less lending capacity |
The Full Transmission Chain — Both Directions
Restrictive (fighting inflation): BoC raises bank rate → chartered banks’ cost of borrowing from BoC increases → chartered banks raise their lending rates to consumers and businesses → borrowing becomes more expensive → consumers and businesses borrow less → spending falls → demand pressure on prices eases → inflation falls
Expansionary (fighting recession/unemployment): BoC lowers bank rate → chartered banks’ cost of borrowing falls → chartered banks lower their lending rates → borrowing becomes cheaper → consumers and businesses borrow more → spending rises → demand increases → economic activity and employment increase
The step you missed before: The chartered banks don’t just “borrow less” — they raise their lending rates to consumers. That’s the pass-through mechanism. The bank rate change flows through to every mortgage, business loan, and credit card in the country.
Money — The Three Functions
You got this right, but the term that matters:
- Medium of exchange (not “medium of trade” — exam term matters)
- Store of value
- Unit of account
Exam Scenario Recognition
| Scenario | Policy | Tool | Direction |
|---|---|---|---|
| Inflation is rising too fast | Restrictive monetary policy | Raise bank rate / sell securities | ↓ money supply |
| Economy in recession, unemployment rising | Expansionary monetary policy | Lower bank rate / buy securities | ↑ money supply |
| BoC announces it will purchase $X billion in government bonds | Expansionary — open market operations | Buy securities | ↑ bank reserves → ↑ lending |
M-1 vs. M-2 (Know the Distinction)
- M-1 = currency in circulation + demand deposits (chequing accounts) — most liquid
- M-2 = M-1 + personal savings deposits + non-personal term deposits — broader measure of money supply