Chapter 8 notes

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Department
Management (MGT)
Course
MGTA02H3
Professor
Janelle Leboutillier
Semester
Winter

Description
Management Chapter 8: Understanding Money and Banking What is Money? Money: any object generally accepted by people as payment for goods and services (usually stamped metal or printed paper; but can also include commodities, ex. Salt, wool) The Characteristics of Money 1. Portability: modern currency is lightweight and easy to handle 2. Divisibility: modern currency is easily divisible into smaller parts with fixed values for each unit (ex. CDN dollar can be divided into 4 quarters, 10 dimes, 20 nickels, 100 pennies < or any combinations of those) 3. Durability: modern currency does not spoil or die, if it wears out it can be easily replaced 4. Stability: paper value fluctuates over time but is considerably more stable than other commodities (ex. Value of fish rises and falls with the fishing season) The Functions of Money Barter economy: economy in which goods are exchanged directly for one another o Inefficient because seller must find buyer who is willing to trade for the specific goods that the seller has (barter trade accounted for half the business transactions in Russia in the late 1990) o Disadvantage in that both people must need something, the exchanged items must be of the same value, and they need something at the exact same time 1. Medium of exchange: way of buying and selling things without inefficiency of barter system 2. Store of value: in the form of currency, money can be used for future purchases, therefore stores value 3. Unit of account: money allows us to measure the relative values of goods and services (all products can be valued and accounted for in terms of money) Legal Tender: medium of payment that is recognized by the legal system to be valid for meeting a financial obligation Paper money is the most common form of legal tender Credit Cards: Plastic Money? Not included in M-1 or M-2, credit cards are a substitute of money, not a store of value They are a temporary medium of exchange, i.e. they are NOT a store of value The Canadian Financial System Businesses need stable financial institutions to underwrite modernization and expansion, and individuals need them to handle currency Financial Institutions The main function of financial institutions is to ease the flow of money from sectors with surpluses to those with deficits. In other words, it is to move money from people that do have money to those without it o A bank can issue financial claims against itself by making available funds for chequing and savings accounts, its assets will be mostly loans invested in individuals and individuals (and in government securities) www.notesolution.com
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