Money Supply

January-12-09
8:40 AM

M1 - is the money stock consisting of non-bank holdings (money in people's pockets and money at
companies) of currency plus demand deposits in banks of people and businesses. This does not include
currency held by banks or owned by the bank of Canada

M1b - this is M1 plus all chequable deposits

M2 - Is defined as M1b plus all notice deposits in a bank and personal term deposits. This does not
include corporation term deposits.

M2a - consists of M2 plus deposits at trust companies, mortgage companies, and shares in credit unions

M3 - consists of M2a plus corporation term deposits plus Canadian foreign currency deposits

• Currency held outside of banks is 37B

• Demand deposits of individuals and businesses is 92B
• Personal saving deposits at chartered banks is 349B
• Non-personal notice deposits at chartered banks is 51B
• Deposits at trust and mortgage companies is 8B
• Deposits at credit unions and caisses populaires is 115B
• Deposits at other financial institutions is 113B

Quantity theory of Money:

P= M +V
Q

P is equalled to the consumer price level

Q is equalled to the quantity of goods and services in the economy.
V is the velocity of money (this is a measure of how fast money is spent in the economy).
M is the money supply

Transaction Velocity Approach

M*V = P*T

M is the money supply

P is the general price level of consumer goods
V is the velocity of money
T is the number of transaction in the economy

13.2 Practise Questions

1. -
a. Expansionary
b. Increase money supply, shift AD to the right, more consumption and investment
2. -
a. 2%
b. Decrease?

13.3 Practise Questions

1. -
a. Bonds + 10000
b. Decrease 500

Unit 4 - Monetary Policy Page 1

 b. Decrease 500
c. 9500
d. 475
2. -
a. -2000
b. -200
c. 1800
d. 9000

Bond Sales

Person A

Scotia Bank

100000

Cash reserve of eg. 10% ($10000)

Unit 4 - Monetary Policy Page 2