Economics 1022A/B Chapter Notes -Credit Union, Mortgage Loan, Payments Canada

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24 Apr 2012
Department
Economics Textbook Notes
Chapter 24 Money, the Price Level, and Inflation
What is Money?
Money is any commodity or token that is generally acceptable as a means of
payment
A means of payment is a method of settling a debt
o When a payment has been made, there is no remaining obligation between
the parties to a transaction
Money serves three other functions:
o Medium of exchange
o Unit of account
o Store of value
Medium of Exchange
A medium of exchange is any object that is generally accepted in exchange for
goods and services
Without it, goods and services must be exchanged directly for other goods and
services an exchange called barter
o A barter requires a double coincidence of wants, which rarely occurs
Unit of Account
A unit of account is an agreed measure for stating the prices of goods and services
To get the most out of your budget, you have to figure out whether seeing one
more movie is worth its opportunity cost
o It is easy to do such calculations when all these goods have prices in terms
of dollars and cents
Store of Value
Money is a store of value in the sense that is can be held and exchanged later for
goods and services
The more stable the value of a commodity or token, the better is can act as a store
of value and the more useful it is as money
o The value of the commodities and tokens that are used as money fluctuate
over time
Inflation lowers the value of money and the values of other commodities and
tokens that are used as money
Money in Canada Today
In Canada today, money consists of:
Currency
Deposit at banks and other depository institutions
Currency
The notes and coins held by individuals and businesses are known as currency
o Notes are money because the government declares them so
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Deposits
Deposits of individuals and businesses at banks and other depository institutions,
such as trust and mortgage companies, credit unions, and caisses populaires, are
also counted as money
Deposits are money because the owners of the deposits can use them to make
payments
Official Measures of Money
Two official measures of money in Canada today are known as M1 and M2
o M1 consists of currency and chequable deposits of individuals and
businesses
M1 does not include held by banks or the government of Canada
o M2 consists of M1 plus all other deposits
Cheques and credit cards are not money
The Banking System
The banking system consists of private and public institutions that create money
and manage the nation’s monetary and payments systems
There are three types of these institutions:
o Depository institutions
o The Bank of Canada
o The payments system
Depository Institutions
A depository institution is a private firms that takes deposits from households
and firms and makes loans to other households and firms
The deposits of three types of depository institutions make up the nations money.
They are:
o Chartered banks
o Credit unions and caisses populaires
o Trust and mortgage loan companies
Chartered Banks
A chartered bank is a private firm, chartered under the Bank Act of 1992 to
receive deposits and make loans
Credit Unions and Caisses Populaires
A credit union is a cooperative organization that operates under the Cooperative
Credit Association Act of 1992 and that receives deposits from and makes loans
to its members
A caisses populaires is a similar type of institution that operates in Quebec
Trust and Mortgage Loan Companies
A trust and mortgage loan company is privately owned depository institution
that operates under the Trust and Loan Companies Act of 1992
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These institutions receive deposits, make loans, and act as trustees for pension
funds and for estates
What Depository Institutions Do
Depository institutions provide services such as cheque clearing, account
management, credit cards, and Internet banking, all of which provide an income
form service fees
Earn most of their income by using the funds they receive from depositors to
make loans and buy securities that earn a higher interest rate than that paid to
depositors
o Reserves notes and coins that are kept in a vault
o Liquid Assets can be sold and instantly converted into reserves
o Securities bonds can be converted into reserves at prices that fluctuate
o Loans commitments of funds for an agreed-upon period of time
Economic Benefits Provided by Depository Institutions
There are four benefits that make these institutions provide that make deposits
willing to put up with a low interest rate, and borrowers willing to pay a higher
one
o Create Liquidity
o Pool Risk
o Lower the Cost of Borrowing
o Lower the Cost of Monitoring Borrowers
The Bank of Canada
The Bank of Canada is Canada’s central bank, a public authority that supervises
other banks and financial institutions, financial markets, and the payments system,
and conducts monetary policy
The Bank of Canada is special in three important ways:
o Bankers to banks and governments
o Lender of last report
o Sole issuer of bank notes
Bankers to Banks and Government
The Bank of Canada has a restricted list of customers. They are:
o Chartered banks, credit unions and caisses populaires, and trust and
mortgage loan companies that make up the banking system
o The government of Canada
o The central banks of other countries
Lender of Last Resort
It is the lender of last resort, which means that it stands ready to make loans
when the banking system as a whole is short of reserves
Sole Issuer of Bank Notes
The Bank of Canada is the only bank that is permitted to issue bank notes
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