Macro Chapter 8 Notes.docx

Macro Chapter 8 Notes.docx - Chapter 8 Notes What is Money...

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Chapter 8 Notes What is Money? Money - any commodity or token that is generally acceptable as a means of payment. Means of payment is a method of settling debt. Money has 3 other functions: 1. Medium of exchange – object that is generally accepted for goods and services. Absence of money leads to exchange directly which is called barter. Barter requires double coincidence of wants, which is rare and costly. 2. Unit of account – agreed measure for stating the prices of goods and services. 3. Store value – money can be held for a time and later exchanged for goods and services. Money in Canada Today Money in Canada consists of: 1. Currency – notes and coins held by individuals and businesses. 2. Deposits at banks and other depositary institutions Official Measures of Money Two main official measures of money in Canada: - M1 which consists of currency held by individuals and businesses plus chequable deposits owned by individuals and businesses. - M2 which consists of M1 plus all other deposits ─ non-chequable deposits and fixed term deposits. Are M1 and M2 Really Money? All items in M1 are means of payment so they are money. Some saving deposits in M2 are not means of payments, they are called liquid assets. Liquidity is the property of being instantly convertible into a means of payment with little loss of value. Deposits are money, but cheques are not. Cheques are instructions to the bank to transfer money. Credit cards are not money since a credit card enables holder to obtain a loan but it must be repaid with money. Depositary Institutions Depository institution – a firm that takes deposits from households and firms and makes loans to other households and firms. Types of Depositary Returns
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Deposits at 3 institutions make up nations money: - Chartered banks: is a private firm that is chartered under the Bank Act of 1991 to receive deposits and make loans. - Credit unions and caisses populaires: is a cooperative organization that operates under the Cooperative Credit Association Act of 1991 and that receives deposits from and makes loans to its members. Caisses populaires similar and operates in Quebec. - Trust and mortgage loan companies Goal of bank is to maximize wealth of its owners. It is achieved by the interest rate at which it lends exceeds the interest rate it pays on deposits. Banks must balance profit and prudence: - Loans generate profit - Depositors must be able to obtain their funds when they want them. A chartered bank puts the depositors’ funds into four types of assets: Reserves—notes and coins in its vault or its deposit at the Bank of Canada Liquid assets—Canadian government Treasury bills and commercial bills Securities—longer–term Canadian government bond and other bonds such as mortgage- backed securities Loans—commitments of fixed amounts of money for agreed-upon periods of time Economic Benefits Provided by Depository Institutions Depository institutions make a profit from the spread between the interest rate they pay on their deposits and the interest rate they charge on their loans.
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