Money, the Bank of Canada and the 2 % target

Three tests for money

Anything is money if it passes three tests: it is a medium of exchange (accepted in payment), a unit of account (prices are stated in it) and a store of value (it keeps purchasing power between receipt and spending). A $20 note passes all three. A credit card fails the first — it does not settle a payment, it defers it; the card is credit, and the money moves when the statement is paid. A GIC passes the third test and fails the first: it is near money, convertible but not spendable.

The aggregates

The Bank of Canada publishes money supply measures that widen in steps. M1+ is currency outside banks plus chequable deposits at banks, trust companies and credit unions — money you can spend today. M2 adds personal savings and non-personal notice deposits; M2+ adds deposits at non-bank institutions and money-market funds; M2++ adds retail instruments and mutual-fund holdings. The exam's idea is the ordering: the further out the aggregate, the less spendable and the more near-money it contains.

What the Bank of Canada does

The Bank is the country's central bank, and its remit is five core areas (as it lists them at time of writing, 2026): monetary policy (the inflation target and the policy rate — Lesson 8.4), the financial system (stability, lender of last resort, oversight of payment infrastructure), currency (designing and issuing bank notes), funds management (banker and debt manager for the Government of Canada — Government of Canada bond and T-bill auctions) and, added in recent years, regulatory oversight of payment service providers and financial-market infrastructure. The older four-function list is the first four; the fifth is the retail-payments and stablecoin mandate.

What the Bank does not do is the exam's favourite question. It does not supervise the chartered banks for solvency — that is OSFI. It does not insure deposits — that is CDIC. It does not regulate dealers or approve prospectuses — that is the provincial regulators and CIRO. It does not set fiscal policy — that is Parliament (Lesson 8.6). A question that pairs a task with the wrong body is testing exactly this table.

The number it aims at

Since 1991 the Bank has run monetary policy under a joint agreement with the Government of Canada on an inflation-control target: keep CPI inflation at the 2 % midpoint of a 1–3 % range. The target is for the rate of inflation, not the price level — a year at 4 % is not made up by a year at 0 %. The agreement is renewed every five years; it was last renewed in 2021, and at time of writing (September 2026) the 2026 renewal is under way. Everything in Lessons 8.4 and 8.5 — the policy rate, the band, the channels — exists to hit that 2 %.