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Macroeconomics- Chapter 8.pdf - What is Money? Any...

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Macroeconomics- Chapter 8What is Money?Any commodity or token that is generally acceptable as a means of paymentMeans of Payment-A method of settling a debt3 other functions:Medium of Exchange:An object that is generally accepted in exchange for goods/servicesBarter-In the absence of money, people would need to exchange goods/servicesdirectly—> Requires a double coincidence of wants, which is rare, so barter is costlyUnit of Account:An agreed measure for stating the prices of goods/servicesStore of Value:Money can be held for a time and later exchanged for goods/servicesMoney in Canada Today:Money in Canada consists of…Currency—> Notes and coins held by individuals/businessesDeposits at banks and other depository institutionsOcial Measures of Money:The 2 main ocial measures of money in Canada are M1 and M2M1-Currency (bank notes + coins) outside the banks + demand deposits located inchartered banksM2-M1 + personal savings deposits + term deposits and non-personal notice depositslocated in chartered banksDemand Deposits-Funds in accounts that can be removed without notice and usuallypay little or no interest (Ex. current accounts, personal checkable accounts)Saving Deposits-Bank deposits that typically earn a rate of return and require astipulated amount of notice to be withdrawn, though rarely enforcedNotice Deposits-Deposits which have a notice requirement in the contractualagreement with the client, although banks almost never enforce this clauseTerm Deposits-Bank deposits paying a market rate of return which are deposited for afixed term and thus have limited liquidity
Are M1 and M2 Really Money?All the items in M1 are means of payment, they are moneySome savings deposits in M2 are not means of payments- liquid assetsDeposits are money, but cheques are not- a cheque is an instruction to a bank totransfer moneyCredit cards are not money. A credit card enables the holder to obtain a loan, must berepaid with moneyLiquidity-The property of being instantly convertible into a means of payment with littleloss of valueDepository InstitutionsA firm that takes deposits from households and firms and makes loans to other householdsand firmsDeposits at 3 institutions make up the nation’s money:Chartered Banks:A private firm, chartered under the Bank Act of 1871 to receive deposits and makeloansCredit Unions and Caisses Populaires (CUCP):Credit Union-A cooperative organization that operates under the Cooperative CreditAssociation Act (revised 1992) and that receives deposits from and makes loans to itsmembersCaisse Populaire-A similar type of institution that operates in QuebecTrust and Mortgage Loan Companies:What Depository Institutions Do:The goal of any bank is to maximize the wealth of its ownersTo achieve this objective, the interest rate at which it lends exceeds the interest rate itpays on deposits (interest rate spread)The banks must balance profit and prudence:—> Loans generate profit—> Depositors must be able to obtain their funds when they want themA chartered bank puts the depositors’ funds into 4 types of assets:Reserves-Notes and coins in its vault or its deposit at the Bank of CanadaLiquid Assets-Canadian government treasury bills and commercial billsSecurities-Longer-term Canadian government bonds and other bonds such asportage-backed securities

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