Textbook Notes (369,204)
Canada (162,462)
MGTA02H3 (363)
Chapter 8

Chapter 8

4 Pages
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Department
Management (MGT)
Course Code
MGTA02H3
Professor
Chris Bovaird

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Description
Chapter 8: Understanding Money and Banking What is Money? The Characteristics of Money:  Money: any object generally accepted by people as payment for goods and services.  Characteristics of money included:  Portability: Currency that is easily affected by deterioration or is too large or uncomfortable to be carried around is not the best kind of money. That is why currency is usually lightweight and easy to handle.  Divisibility: Currency should be easily divisible, and easily given out. They also must have easily determined values.  Durability: Currency must be able to able to retain its value for a long period of time. It cannot spoil, nor die.  Stability: There must be a stoic demand for the currency. Inflation would result in less demand for consumption while deflation would result in too much demand. The Functions of Money:  Medium of exchange: money is used as a way to buy or sell things. Without money, society would be bogged down in a system of barter.  Stores of value: In the form of currency, money can be used for future purchases and therefore “stores” value.  Unit of account: money lets us measures the relative values of goods and services. It also acts as a unit of account because all products can be valued and accounted for in terms of money. Credit Cards = Plastic Money:  Credit – especially extended through credit cards has become a major factor in the purchase of consumer goods in Canada  The use of credit cards has become so widespread that many people refer to them as “plastic money”.  However, credit cards do not qualify as money, but more as a money substitute.  They serve as a temporary medium of exchange but are not a store of value.  Credit cards are big business for two reason:  They are very convenient  They are also very profitable for issuing companies. These profits stem from two sources:  Some cards charge annual fees to holder, and all cards charge interest on unpaid balances  Merchants who accept credit cards pay fees to card issuers The Canadian Financial System Summary:  Many forms of currency especially demand deposits and time deposits, depends on the existence of financial institutions to provide a broad spectrum of services to both individuals and businesses.  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.  They do this by issuing claims against themselves and using the proceeds to buy the assets of – and thus invest in – other organizations.  A bank for instance can issue financial claims against itself by making available claims for chequing and saving accounts.  In turn, its assets will be mostly loans invested in individuals and businesses and perhaps in government securities.  There are a variety of financial intermediaries in Canada.  They vary:  in size  in importance  in the types of sources they appeal to  in the form of the claim they give to sources of funds  in the users they supply credit to  in the type of claim they make against the users of funds  For many years, the financial community in Canada was divided rather clearly into four distinct legal areas.  Often called the four financial pillars, they include:  Chartered banks  Alternate banks such as trust companies and credit unions  Life insurance companies and other specialized lending and saving intermediaries (factors, finance companies, venture capital firms, mutual funds and pension funds)  Investment dealers Financial Pillar #1 – Chartered Banks Summary:  Chartered bank: a privately owned, profit-seeking firm that serves individuals, non-business organizations, and businesses as a financial intermediary.  They are the largest and most important financial institution in Canada.  They also offer a unique service, in which their liability instruments (the claims against their assets) are generally accepted by the public and by business as money or as legal tender.  Canada has a branch banking system. Unlike the United States, which has hundred of banks, with only a few branches each, Canada has a few banks with hundreds of branches each. Services Offered by Banks:  Pension services: most banks help customers establish savings plans or retirement. Banks serve as financial intermedi
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