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Lecture

ECON 1010 Lecture Notes - Mortgage Loan, Royal Canadian Mint, Deposit Account


Department
Economics
Course Code
ECON 1010
Professor
Steven Edwards

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Chapter 24: Money, the Price Level, and Inflation
What is Money?
Any commonditiy or token that is generally acceptable as a means of payment
Means of payment is a method of settling a debt
Money has 3 functions: medium of exchange, unit of account, store of value
Medium of Exchange
Any object that is generally accepted in exchange for goods and services; withput it, G
and S must be exchanged directly for other G and S; ancient shit called bartering
Requires double coincidence of wants, shits rare though.
Medium of exhchange overcomes double coincidence of wants
Unit of Account
Is an agreed measure for stating the prices of goods and services
Store of Value
Can be held and exchanged later for goods and services. If money were not, it could not
serve as a means of payment
Other commodities can serve as a store of value however the more stable to commoditiy
the better it is as a store of value
Need a low inflation rate maximizes money as a store of value
Money in Canada Today
Money consists of
Currency
Deposits at banks and other depository institutions
Currency
The notes and coins held by an insititution are known as currency
Money because the government declares them as money
Deposits
Deposits at banks or other depository institutions count as money
Money because the owners of the deposits can use them to make payments
Official Measures of Money
M1 and M2
M1- currency and chequable deposits of individuals and businesses (doesn’t include
currency held by banks, or currency and chequable deposits of the government of
Canada)

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M2- M1 + all other deposits
Are M1 and M2 Real Money?
Money is a means of payments this is key
Currency is money
Deposits? Chequable deposits are money because they can be transferred from from one
person to another
M1 is currentcy + chequable deposits so M1 is money
Some savings deposits are not means of payments= liquid assets= liquidity property of
ease of being convereted into a means of payment without a loss in value= M2=Money
Deposits are Money but Cheques are Not
Cheques are not money
There is no extra money, money is just being transferred and moved. (bank example)
Credit Cards are Not Money
Credit card works as an ID card…that lets you take out a loan the instant you buy
something. You have to pay it back. Its not the means of payment. Its not money
The Banking System
Divided into three groups: depository institutions, the bank of Canada, the payments
system
Depository Institutions
Private firm that takes deposits from households and firms and makes laons to other
households and firms. Deposirs of three typews of depository intisitutions make up
Canada’s money: Chartered banks, credit unions and caisse popularrires, trust and
mortgage loan companies
Chartered Banks
Private firm, under bank act of 92 to receive deposits and make loans
Largest of banking systrems
Credit Unions
Cooperative organization that operates under the Cooperative Credit Association Act of
92 and recives deposits from and makes loans to its members
Trust and Mortgage Loan Companiews
Privately owned depository institution that operates under the trust and loan companies act of 92.
Recieves deposits, makes loans, and act as trustee for pension finds and for estates
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What Depository Insitutions do
Provides cheque clearing services, account management, credit cards, internet banking,
collecting service fees
Buy securites to make more money
Do this buy buying securities that earn a higher interest rate than what they pay to
depositors. Balancing act, chatered bank example
Chartered bank puts funds it recives into four types of assets
1. Reserves-notes and coins in a banks vault or in a deposit account at the Bank of Canada;
used to meet depositors currency withdrawls and to make payments to other banks (keeps
half of a percent of deposits as reserves)
2. Liquid Assets- treasury bills and commercial bills. First line of D if they need reserves.
Cam be sold and concerted with no risk. Low interest
3. Securities-governeent bonds and other types of bonds. Can be converted to reserves but
prices fluctuate. Riskier, and higher interest rate
4. Loans-commitments of finds for an agreed upon time. Riskiest. Cant be converted until
they are due to be repaid, default. Higher interest rate
Economic Benefits Provided by Depository Insitutions
Create liquidity- borrowing short term, lending long
Pool risk- default loans on 1 person you lose everything, with 1000 people you lose
almost nothing. Pools interest
Lower the cost of borrowing-
Lower the cost of monitoring borrowers- lenders can encourage good decisions that
prevent defaults. Costly. Depository institutions can perform this task at a much lower
cost
Bank of Canada
Canada’s central bank, supervises other banks and financial institutions, financial
markets, and the payments system, condicts monetary policy. The banks of Canada is the
banker to banks and government, lender of last resort, sole issuer of bank notes
Banker to Banks and Government
Works with chartered banks, credit unions, and caisse populaires, and trust and mortgage
loan companies that make up the banking system; the government of Caanda; centreal
banks of other governments
Accepts deposits; part of reserves
Lender of Last Resort
Makes loans to banks
Last resort means that if another banks needs reserves they are ready to make loans to
banks
Sole Issuer of Banks Notes
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