The use of money as a medium of exchange eliminates the need for clumsy barter arrangements. Any commodity will serve as money so long as it is universally acceptable. To serve efficiently it should have the additional qualities of easy portability, easy recognizability, divisibility, durability, and stability in value.
For many centuries money consisted exclusively of metal coins. Paper money in the form of goldsmith’s receipts came into use in 17th century England. These were supplanted by bank notes; during the 19th century bank deposits came to serve as money also, and are now the most important form of money in modern countries.
The quantity of money in existence, together with the velocity of its circulation, will determine the aggregate of expenditures in any period, and so will strongly affect the price level.
The relationship between the money supply and the price level may be demonstrated by the transactions approach, or by the cash balances approach. The former emphasizes the significance of people’s decision to spend their money; the latter emphasizes the significance of their decisions to hold it. Since all money must be spent or held, the two approaches simply represent different ways of looking at the same phenomenon.
Changes in the price level can be represented by means of price indexes, which show the average change in the prices of many goods over a period of time.
The Canadian price level has risen considerably, though unevenly, during the present century. Its sharpest increases have occurredduring wars and in the immediate aftermath of wars.
Major price level shifts have important economic effects. The level of economic activity is liable to be adversely affected, and a redistribution of real wealth and income is liable to occur as between different groups of persons in the country.
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