Money= any commodity or token that is generally acceptable as a means of payment
Means of payment= method of settling a debt.
Three imp functions of money
(i) Medium of exchange (ii) Unit of account (ii) Store of value
Medium of Exchange
Any object that is accepted in exchange for goods and services.
Without medium of exchange, goods & services are directly traded called Barter
Barter requires double coincident of wants
Unit of account
is an agreed measure for settling the prices of goods and services For example looking at
the price of a pop in theatres in dollars and cents
Store of Value
Money can be held and exchanged later for goods and services. But inflation lowers the
value of money and other commodities such as house values go up.
-Low inflation rate is better for value of money to be useful
Money in Canada Today
Money consists of
(i) Currency (ii) Deposits at banks and other depository institutions
Currency= notes and coins held by individuals and businesses
Deposits= trust mortgage, credit unions, caisses populaires are counted as money
Offical Measures of Money
Two official measures of money in Canada are known as M1 and M2.
M1= currency , chequable deposits,
DOES NOT INCLUDE currency held by banks, currecncy and cheuqable deposits by
the govt. of Canada.
--M1 is money M2= includes all the M1 + all other deposits
Some savings deposits are not measns of payment there they are NOT MONEY
M2 is liquid assets.
Deposits are money but Cheques are NOT money. Cheques are just to tell the bank to
transfer the money from the account to pay for certain things.
Credit cards are not money , they are loan IDS . Not means of payment or money.
THE BANKING SYSTEM
- Have public and private system
- Divided into 3 categories
1. Depositary institutions = takes deposits from other households and firms and
makes loans to other households and firms. Serve as cheque clearing, account
management, credit cards and internet banking provide income from the service fees.
(i) Chartered Banks
-receives deposits and makes loans
(ii) Credit unions and caisses populaires
-cooperative organization that operates under the Cooperative Credit
-receives deposits and make loans to its members
-Caisses populaires is similar and operates in Quebec
(iii)Trust and mortgages loan companies
-receive deposits, make loans, and act as trustee for pension funds and for
- -puts fund it reserves into FOUR types of assets
(1) Reserves=notes and coins
(2) Liquid Assets= government of Canada treasury bills and commercial
(3) Securities= bonds and other bonds such as mortgage-backed securities (4) Loans= commitments of funds for an agreed upon period of time.
-Creates Liquidity= borrowing short and lending long, make long run loan
-Pool Risk= provide protection under catastrophic events, earthquakes, floods etc
-Lower the cost of borrowing
-Lower the Cost of Monitoring Borrowers
2. Bank of Canada
-The Bank of Canada is Canada’s central bank
-Important in 3 ways
(i) Banker to banks and government=chartered banks, credit unions and casisses
populaires , trust and mortgage are all customers which it accepts deposits from.
(ii) Lender of last resort=makes loans to the banks. Its called lender of last resort
because its ready to make loans when the banking system is short of reserves.
(iii) Sole issuer of bank notes=Only bank that can issue bank notes
Bank of Canada has two main assets:
(i) Government securities
(ii) Loans to depository institution s
Banks of Canada Liabilities (Responsibilities)
(i) Bank of Canada notes *coins are not liabilities*
(ii)Depository institution deposits
Monetary base: is the sum of Bank of Canada notes, coins, and depository institution deposits;
in order to change it , it needs to conduct open market operation .
Open market operation = is the purchase or sale of go