Chapter 25 Review

Chapter 25 Review - Chapter 25: Money, Banking, and...

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Chapter 25: Money, Banking, and Interest Rates What is Money? Money is something acceptable as a means of payment (method of settling a debt), and has three functions – medium of exchange, unit of account, store of value. Medium of exchange – accepted in exchange for goods and services o Better than barter (direct exchange for goods for goods) – guarantees double coincidence of wants Unit of account – agreed measure for prices Store of value – exchangeable at a later date Money today is currency (coins + Bank of Canada notes) and deposits (can be converted into currency and used to pay debts). Cheques are only an instruction to bank Debit cards are like cheques, while credit cards are ID cards for loans – neither is money. There are two official measures of money: M1 : currency outside banks + private demand deposits at banks M2+ : M1 + personal savings deposits at banks + nonpersonal notice deposits at banks + all deposits at other financial institutions Currency plus some deposits are means of payments; other deposits are not, but have liquidity (quickly convertible to means of payments). The Banking System The banking system consists of the depository institutions, the Bank of Canada, and the payments system. Depository institutions take deposits from households and firms, and make loans to others, o Three main types are chartered banks (chartered under Bank Act), credit unions and caisses populaires, and trust and mortgage loan companies. Banks maximize wealth of owners by lending out deposits, balancing security against profits. o Banks keep reserves (cash + deposits at Bank of Canada) to meet demand for currency o Banks have four other types of assets; overnight loans (to other banks); liquid assets (such as government Treasury bills); investment securities (longer-term government bonds); and loans (to corporations and households). Banks make profits by paying depositors low interest rates and lending at high rates, in return for the following services: o Creating liquid assets o Minimizing cost of borrowing funds o Minimizing cost of monitoring borrowers o Pooling risks
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The Bank of Canada is Canada’s central bank (supervises financial institutions and markets, and the payments system, and conducts monetary policy). o
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Chapter 25 Review - Chapter 25: Money, Banking, and...

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