ch25 - Money Banking and Interest Rates What is Money Money...

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Chapter 25 Money, Banking, and Interest Rates What is Money? Money is any commodity or token that is generally acceptable as the means of payment. A means of payment is a method of settling a debt. When payment has been made, there is no remaining obligation between the parties to a transaction. Money performs three other functions: o Medium of exchange o Unit of account o Store of value A medium of exchange is any object that is generally acceptable in exchange for goods and services. Without money, it would be necessary to exchange goods and services directly for other goods and services—an exchange called barter . A unit of account is an agreed measure for stating the prices of goods and services. In the absence of a standardized unit of account, keeping track of prices and comparing prices would be difficult. A store of value is any commodity or token that can be held and exchanged later for goods and services. The more stable the value of a commodity or token, the better it can act as a store of value and the more useful it is as money. Money in Canada today consists of currency and deposits at banks and other financial institutions. The coins and Bank of Canada notes that we use today are known as currency . The two main measures of money are called: o M1 o M2+ M1 consists of currency held outside the banks plus demand deposits at chartered banks that are owned by individuals and businesses. M1 does not include currency held by banks, and it does not include currency and bank deposits owned by the government of Canada. M2+ consists of M1 plus personal savings deposits and nonpersonal notice deposits at chartered banks plus all types of deposits at trust and mortgage loan companies, credit unions, caisses populaires, and other financial institutions. Deposits are money but cheques are not money.
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A cheque transfers a deposit from one account to another. Credit cards and debit cards are not money. The Banking System A depository institution is a private firm that takes deposits from households and firms and make loans to other households and firms.
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