RSM chapter 18
Money: a portable, divisible, durable and stable object generally accepted by people as payment for goods
Portability: currency is lightweight and easy to handle
Divisibility: currency is easily divisible into smaller parts with fixed values for each unit, eg: dollars can be
changed to 10 dimes, 20nckels, and 100 pennies. It is easy to match units of money with the value of all
Durability: currency does not spoil, it does not die, and if it wears out, it can be replaced with new coins or
Stability: while the value of the paper money we use today has fluctuated over the years, it is more stable
Function of money:
Barter economy: one in which goods is exchanged directly for one another.
The barter economy is inefficient compared to money economy
Medium of exchange: we use money as a way of buying and selling things
Store of value: money can be used for future purchases and therefore “stores” values
Unit of account: money lets us measure the relative values of goods and services
M-1, counts only the most liquid forms of money-currency and demand deposits, (chequing accounts) in
Currency: paper money and coins issued by government
“This note is legal tender”, the law requires a creditor to accept it in payment of a debt.
Illegal tender (counterfeiting) has been a problem for many years, new technologies like scanners and color
copiers allow it to make real-looking bills rather easily.
Cheque: an order instructing the bank to pay a given sum to a specified person or firm, it allows buyers to
make large purchases without having to carry large amounts of cash
Demand deposits: money in chequing accounts, counted as M-1 because such funds may be withdrawn at
any time without notice
M-2 everything in the M-1 money supply plus savings deposits, time deposits, and money market mutual
funds, M-2 accounts for nearly all of the nation’s money supply.
Time deposits: a deposit that requires prior notice to make a withdrawal cannot be transferred to others by
Cheque; time deposits pay higher interest rates.
Money market mutual funds: funds operated by investment companies that bring together pools of assets
from many investors, the fund buys a collection of short-term, low-risk financial securities. These funds have
Credit cards, has become a major factor in the purchase of consumer goods in Canada. “Plastic money” is
actually 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 reasons:
1 it are quite convenient for consumers
2 they are extremely profitable for issuing companies because of fees they collect, annual fees or interest on
unpaid balances; merchants also pay fees to card issuers
Each time a card is used, the banks receive an “interchange” fee, which is a percentage of the purchase
value of the transaction; the banks used these fees to offset costs they incur with loyalty and points
Credit-card fraud is an increasing concern for both consumers and retailers