Means of payment: Method of settling a debt. When the payment has been made, neither party have any obligations.
Money: Any commodity that is generally acceptable as a mean of payment; Used as:
o Medium of exchange
Any object that is generally accepted in exchange for goods and services.
Without money, people must barter, exchange goods and services directly for other things.
To barter, double coincidence of wants is necessary, which is rare and inefficient.
Money isn‟t the only medium of exchange, but sources such as credit cards are not considered money.
o Unit of account
An agreed measure for stating the prices of goods and services.
To get the most out a budget, the opportunity cost must be calculated, which is easier with money.
o Store of value
Money can be held and exchanged later for goods and services.
Must be so to be a means of payment. Does not have to be money, but it is the most stable commodity.
Inflation lowers the value of money and other commodities. To be useful, inflation rate must be low.
Money in Canada: Consists of:
o Currency: Notes and coins held by individuals and businesses
Money inside banks are not currency because they are not held by individuals or businesses
Convenient for settling small debts and buying low priced items
o Deposits of individuals and businesses at banks and other institutions.
Money because owner of deposits can use them to make payments.
Official measures of money:
Currency held by individuals and businesses
Personal chequable deposits
Non-personal chequable deposits
Personal non-chequable deposits
Non-personal chequable deposits
Fixed term deposits
o Currency is considered money as stated above.
o Chequable deposits are considered money because they can be transferred using a cheque or a debit card.
o Savings accounts are considered money because they are liquid assets (assets that can be easily converted into a
means of payment without loss in value)
o Cheques and credit cards are not money, they are simple means of payment.
Depository institution: Private firm that takes deposits from households and firms and make loans to others. They are:
o Chartered banks: A private firm, chartered under the Bank Act of 1992 to receive deposits and make loans.
By far the largest institutions in the banking systems and conduct various types of banking issues.
o Credit unions and caisses populaires
A cooperative organization that operates under the cooperative credit association of 1992
Receives deposits from and makes loans to its members (caisses populaires in Quebec)
o Trust and mortgage loan companies
Privately owned depository institution that operates under the trust and loans companies‟ act of 1992.
Receive deposits, make loans, and act as trustees for pension funds and estates.
o As of 1992, all the institutions are called „banks‟, under the laws created in 1992.
o Earn income from:
Cheque clearing, account management, credit card and internet banking, through service fees
Using funds received from depositors to make loans and buy securities that earn a higher interest rate than
that paid to the depositor. These assets are:
o Notes and coins in a depository institutions vault or its deposit account at the BoC.
o Used to meet depositors‟ currency withdrawals and payment to other banks
o Usually, 0.5% of deposits are kept as reserves.
o Government treasury bills and commercial bills.
o Can be sold and instantly converted into reserves with almost no risk of loss.
o Low interest rate due to low risk.
o GoC bonds and other bonds such as mortgage backed securities.
o Can be converted into reserves, but prices fluctuate.
o Riskier than liquid assets and therefore higher interest rate.
o Commitments of funds for an agreed upon period of time
o Are made to corporations to finance purchase of capital, and to individuals to fiancé
consumer durable goods (credit card bill, boat, car, etc.) and homes.
o Riskiest of assets, and earn the highest interest rate.
o Provides benefits including:
Create liquidity: Banks “borrow short and lend long”, which create liquidity.
Pool risk: Banks take multiple customers, which causes % loss to be minimal.
Lower the cost of borrowing
Lower the cost of monitoring borrowers
Bank of Canada (BoC): Canada‟s central bank; public authority that supervises other banks and financial institutions,
financial markets, and the payments system, and conducts monetary policy.
o Accepts deposits, makes loans, and holds investment securities. However, special in that they are:
Banker to banks and government
Restricted list of customers; charted banks, credit unions, trust and mortgage companies o Bank of Canada and central banks of other countries
o Chartered banks,
The customers‟ deposits become part of the reserves of the bank
Lender of last resort
Stands ready to make loans when the banking system as a whole is short of reserves
An individual bank needing reserves can get an overnight loan from another bank
Sole issuer of bank notes
o Influences the economy by changing the interest rate, by changing the quantity of money in the economy. This
amount depends on:
Government securities (treasury bills that is bought from the bills market)
Loans to depository institutions
Bank of Canada notes
Depository institution notes
Monetary base: Sum of BoC notes, coins, and depository institution deposits at the BoC
Acts like a base that supports the nation‟s money
o Open market operation: Purchase or sale of government securities by the BoC in the open market
Changes the monetary base
Open market purchase: If the BoC makes a $100 purchase of government securities
The BoC pays for securities by placing $100 at CIBC‟s deposit account at the BoC
CIBC has $100 less securities (assets) and the BoC has $100 more securities (assets).
CIBC‟s total assets are unchanged.
The BoC‟s assets and liabilities increase by $100.
Open market sale: If the BoC sells $100 sale of government securities:
CIBC pays for the securities using $100 of its reserve deposits
CIBC has $100 more securities and the BoC has $100 less securities.
CIBC‟s total assets are unchan