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Chapter 8

HLTH AGE 4Z06 chap 8

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McMaster University
Health, Aging and Society

Chapter 8 • Money is an object generally accepted as payments for products, has 4 key qualities: o Portability o Divisibility o Durability o Stability o (difficult to counterfeit) • Barter economies, where goods are exchanged directly for each other, are inefficient compared to money economies. Money has three functions: o Medium of exchange o Store of value o Unit of account, all products can be valued in terms of the money • Money substitutes such as credit cards also exist of convenience • Purpose of financial institutions is to ease money flow from sectors with surpluses to those with deficits • Previously, there were 4 key legal elements of the financial system; this distinction began to erode in 1980. Financial Pillar 1: Chartered Banks • Privately owned firms that serve as financial intermediaries in an economy, are profit-seeking. • Schedule A banks are the major banks we hear about (e.g. TD Canada Trust), the 1980 Bank Act requires that no more than 10% of voting shares be controlled by a single interest • Schedule B banks are usually foreign entities set up in Canada, and are not required to follow the 10% rule mentioned above • Services offered by banks: o Pension services to help customers plan for retirement with investments o Trust services: look after money. A fund of money is set up and the bank will invest the money and pay the proceeds to the beneficiaries. o International services  Currency exchange  Issue letters of credit –a promise to by a bank to pay money to a business if conditions are met (e.g. not until proof of shipment is given).  Draw up a banker’s acceptance: a promise that the bank will pay a specific amount of money at a future date. o Financial advice o Automated teller machines • Bank deposits o Chequable/demand deposits constitute a chequing account from which customers can write cheques from o A term deposit will remain with the bank and collects interest ‘  Aside from a savings account, Guaranteed Investment Certificates (GICs) are also term deposits. They cannot be cashed in before maturity. • Bank loans o Secured loan: backed by collateral that will be seized if the loan in not repayed. o Unsecured loans are only a promise to repay o Prime rate of interest: lowest rate charged to borrowers such as chartered banks borrowing from the Bank of Canada and large firms borrowing from chartered banks. Consumer loans use the ‘base rate.’ Banks as Creators of Money • In the Canadian financial system, banks create money by lending out deposited idol money. When it is let out, the same money that was originally deposited is spent, so money is generated. o Reserve requirement: the portion of demand deposits that cannot be loaded out, the requirement was dropped in 1991. o Banks keep reserves in case a “run on the bank” occurs (customer
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