Chapter 24 - MONEY
Money is defined as any commodity or token that is generally acceptable as a means of payment.
A means of payment is a method of settling a debt.
Money serves three functions: Medium of exchange, Unit of account, Store of value
Medium of exchange – any object that is generally accepted in exchange for goods/services.
Unit of account – is an agreed measure for stating the prices of goods and services.
Store of value – it can be held and exchanged later for goods and services.
Money consists of: Currency, Deposits at banks and other depositary institutions
Currency is the notes and coins held by individuals and businesses.
Deposits include deposits of individuals/businesses at banks and other depository institutions such as
trust and mortgage, credit unions, cassias popularize.
Two official measures of money: M1, M2
M1 consists of currency plus cheque able deposits and each of these is a means of payment, so M1 is
M2, saving deposits are a means of payment. These deposits are liquid assets.
Liquidity is the property of being easily convertible into a means of payment without loss in value
Deposits are money but cheques are not. Credit cards are not money.
A depository institution is a private firm that takes deposits from households and firms and makes loans
to other households and firms.
There are three types of depository institutions: Chartered banks, Credit Unions and Caises, Trust and
Mortgage loan companies.
A chartered bank is a private firm, charted under the bank act of 1992 to receive deposits and make
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.
Trust and mortgage loan company is a privately owned dep. Institution that operates under the Trust
and Loan companies act of 1992. Receive deposits, make loans and act as a trustee for pension funds
and for estates. A charted bank borrows into four types of assets:
Reserves – these are notes and coins in its vault or its deposit account and the Bank of Canada. Used for
withdrawls and payment to other banks.
Liquid assets – government of Canada treasury bills and commercial bills. These are the first line of
defence is they need reserves.
Securities – Gov. of Canada bonds and other bonds such as mortgage-backed securities. Riskier than
liquid assets but high interest.
Loans – Funds to corporations to finance the purchase of capital. Long-term agreements.