Textbook Notes (363,041)
Canada (158,169)
RSM100Y1 (431)
Chapter 18

chapter 18

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University of Toronto St. George
Rotman Commerce
Stojanovic Dragan

Chapter 18 Understanding Money and BankingWHAT IS MONEY The Characteristics of Money y In history many different objects have been used as money in different societies y Modern money usually takes the form of stamped metal or printed paper that is issued by the governmentCanadian dollar British pounds Japanese yen etc y Just about any object can act as money if it is portable divisible durable and stable that people accept as payment for goods and services y Portabilitylightweight and easy to handle y Divisibilitydollar can be divided into pennies nickels dimes and quarters to pay the exact amount y Durabilitydoes not spoil does not die and if it wears out can be replaced with new coins or paper money y Stabilitywhile the money of paper has fluctuated over the years it is still considerably stable The Functions of Money y Barter Economy one in which goods are exchanged directly for one anothersell good for money and then use the money for a new product y Money Economyy Barter economy is inefficient compared to money economy y Three functions of money 1 Medium of Exchange y we use money as a way of buying and selling things y without money we would be begged down in a system of barter 2 Store of Value y Money can be used for future purchases and therefore stores value 3 Unit of Account y Money lets us measure relative values of goods and services y Acts as a unit of account since all products can be valued and accounted for in terms of money The Spendable Money Supply M1 y Before money can act as a medium of exchange store or value or unit of account buyers and sellers must agree on its value y Value of money dependsin parton its supplyhow much money is in circulation y When money supply is highvalue decreases y When money supply is lowvalue increases y Not easy to measure the supply of money nor is there a complete agreement on how it should be measured y narrow definition of money is called M1 y M1 only the most liquid forms of money currency and demand deposits y Currency paper money and coins issued by the government y Illegal tender counterfeiting has been a problem for many years y New technologies like scanners and colour copiers allow counterfeiters to make reallooking bills rather easily y Majority of Canadian households have chequing accounts against which millions of cheques are written each year y Cheque an order instructing the bank to pay a given sum to a specified person or firm y Enable purchasers to make large purchases without carrying large amounts of money around with them y Sellers gain a measure of safety since cheques are put in their name and they can trade them in for cash latermoney in chequing accounts counted as M1 because such funds may be y Demand Depositswithdrawn at any time without notice M1 Plus the Convertible Money Supply M2everything in the M1 money supply plus savings deposit time deposits and money y M2market mutual funds y Accounts for nearly all of the nations money supply y Measures the store of monetary value that is available for financial transactions y When the overall level of money increases more is available for customer purchases and business investment and vice versa y Time Deposits unlike demand deposits a deposit that requires prior notice to make a withdrawal cannot be transferred to others by chequeeg certificates of deposits and savings certificates y Pay high interest ratesfunds operated by investment companies that bring together yMonetary Market Mutual Fundspools of assets from many investors y Funds buy a collection of shortterm lowrisk financial securities y Ownership of and profits or losses from the sale of these securities are shared among the funds investors Credit Cards Plastic Money y Although not included in M1 or M2 creditespecially credit cardshas become a major factor in the purchase of consumer goods in Canada y Credit card usage has become so common that many people refer to them as plastic money
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