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EC140 (329)
Chapter 24

Chapter 24 EC140.docx

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Wilfrid Laurier University
Angela Trimarchi

EC140 Chapter 24 – Money, the Price Level, and Inflation and Mathematical Note Week 11 What is Money? -A means of payment is a method of settling a debt -Money serves three other functions: -Medium of exchange -Unit of account -Store of Value Medium of Exchange -A medium of exchange is any object that is generally accepted in exchange for goods and services -Without a medium of exchange, goods and services must be exchanged directly for other goods and services – bartering -A medium of exchange overcomes the need for a double coincidence of wants – which rarely occurs -Money isn’t the only medium of exchange, you can buy with a credit card Unit of Account -A unit of account is an agreed measure for stating the prices of goods and services -If the price of a movie is $8, and the price of a pop is $4, you know right away that seeing one movie costs you 2 cases of pop -Though it would be confusing to state that, so we use money to state the cost of goods Store of Value -Money is a store of value in the sense that it can be held and exchanged later for goods and services -If money were not a store of value, it could not serve as a means of payment Money in Canada Today -Consists of: -Currency – the notes and coins held by individuals and businesses -Deposits – trust and mortgage companies, credit unions, and caisses populaires are also counted as money  Cheques are not considered money  Credit cards are not money -Official measures of money – M1 consists of currency and chequable deposits and M2 consists of M1 and all other deposits.  M1 is considered money  Most forms of M2 are counted of money, the ones that are not are called liquidity assets The Banking System -There are three types of institutions in Canada: -Depository institutions -The Bank of Canada -The payments systems Depository Institutions -A private firm that takes deposits from households and firms and makes loans to other households and firms -Chartered Banks – a private firm chartered under the Bank Act of 1992 to receive deposits and make loans. The largest institution of banking systems -Credit Unions and Caisses populaires – a cooperative organization that operates under the Cooperative Credit Association Act of 1992 and that receives deposits from and makes loans to EC140 Chapter 24 – Money, the Price Level, and Inflation and Mathematical Note Week 11 its members. A caisse populaire is the French version -Trust and Mortgage Loan Companies – a privately owned depository institution that operates under the Trust and Loan Companies Act of 1992. They make deposits, loans and act as trustee for pension funds and for estates -Depository institutions provide services such as cheque clearing, account management, credit cards, and Internet banking, provided from an income of service fees -A chartered bank puts the funds it receives into four types of assets: -Reserves – notes and coins in a bank’s vault of in a deposit account at the Bank of Canada -Liquid assets – government of Canada Treasury bills and commercial bills -Securities – government of Canada bonds and other bonds such as mortgage-backed securities -Loans – commitments of funds for an agreed-upon period of time -Economic benefits provided by depository institutions: -Create liquidity – they create liquidity -Pool risk – if you lend to one person who defaults, you lose the entire amount loaned -Lower the cost of borrowing -Lower the cost of monitoring borrowers – a lender can encourage good decision that prevent defaults Bank of Canada -Canada’s central bank -It is the: -Banker to banks and government – the Bank of Canada has a restricted list of customers -Lender of last resort – makes loans to banks – 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 – only bank that is permitted to issue bank notes -The Bank of Canada’s balance sheet: -The Bank of Canada’s Assets: government securities – treasure bills, and loans to depository institutions -The Bank of Canada’s Liabilities: Bank of Canada notes are the dollar bills that we use in our daily transactions, and depository institution deposits are part of the reserves of these institutions -The Bank of Canada’s liabilities together with coins issued by the Royal Canadian Mint make up the monetary base – it is the sum of the Bank of Canada notes, coins, and depository institution deposits at the Bank of Canada -To change the monetary base, the Bank of Canada conducts an open market operation – which is the purchase or sale of government of Canada securities – treasury bills and bonds The Payments System -The system in which banks make payments to each oth
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