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Money and the Banking System

by Anu J
4 Pages
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York University
ECON 1010
Steven Edwards

Notes by: ANU J Macroeconomics – Steve Edwards Money - Any commodity measured as a form of payment = money - Means of settling a debt - Serves 3 functions: o Medium of exchange  Object generally accepted in exchange for goods and services  Money makes possible the benefits of specialization and division of labour  Credit card is an example of a medium of exchange  Not as efficient  Creates a debt; doesn’t make a final payment  Characteristics that the commodity (money) needs to fulfil:  Recognized  Readily acceptable  High value relative to weight  Easily divisible  Reasonably durable  Difficult to counterfeit  Formal list (found on Wikipedia): value common assets, constant utility, low cost of preservation, transportability, divisibility, high market value in relation to volume and weight, recognisability, resistance to counterfeiting o Unit of account  Standard monetary measurement of value  Common denominator for all goods and services  Allows for a meaningful interpretation of prices o Store of account  Has a stored, stable value  Durable and long-lasting  Serves as a means of payment  Other examples: gold, artwork, real estate, exotic cars, anything else unique - Monetary system can only function if everyone using it trusts that the commodity has the value it says it does, and that everyone accepts it as such Money in Canada - In Canada, money exists in two ways: o Currency Professor: Steve Edwards Course: Introduction to Macroeconomics (ECON 1010) Notes by: ANU J  Notes and coins measured as money  Declared “legal tender” o Deposits in banks and other financial institutions  Money placed in secured form  Money available to you to clear a debt - Canada has 2 ways to deal with money: o M1  Narrow definition  Money supplied that includes all physical money i.e. coins, demand deposits  Most liquid form of money supply  Assets can be quickly converted into currency o M2  Broader definition  Includes M1  In relation to all deposits i.e. savings deposit  To be able to quantify a larger amount of money that is in circulation o M3 (don’t need to know this)  Broadest definition  Includes M1 and M2  Includes all long-term deposits, institutional monetary funds, etc. Banking System in Canada - Private and public institutions that create money and manage the nation’s monetary and payment systems o Divided into three groups:  Depository institutions  Private firm o Provide a service o Provide an income for owners (profit-maximizing firm)  Takes deposits from households and firms  Makes loans out to other households and firms  Governed by the Bank Act of 1992  Deposits used up into three types of institutions: o Chartered banks  Private firm  Chartered under a licence to receive deposits and give loans  14 Canadian-owned banks Professor: Steve Edwards Course: Introduction to Macroeconomics (ECON 1010) Notes by: ANU J  33 foreign-ow
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