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Chapter 24

Chapter 24 - Money & Price level.docx

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ECON 1010
Steven Edwards

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 money. 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 loans. 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. Deposito
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