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ch.11-12 - Chapter 11 The monetary system The existence of...

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Chapter 11: The monetary system The existence of money makes trade immensely easier in a complex society – just imagine if you had to barter everything you want to acquire. However the management of money creates challenges. For example, as we will see in subsequent chapters, too much money in an economy can create inflation. Too little money can create a recession. Definition: Money is the set of assets in an economy that people regularly use to buy goods and services from other people. Money has three functions in the economy: Medium of exchange: money can be used by sellers when they want to purchase goods an services. Unit of account: money is the yardstick people use to post process and record debts. Store of value: people can use money to transfer purchasing power from the present to the future. Two kinds of money commodity money takes the form of a commodity with intrinsic value (gold, silver, cigarettes) Fiat money is used as money because of government degree. It does not have intrinsic value (coins, currency, check deposits). This is what we use in Canada. Money in the Canadian Economy The money stock in the economy is the amount of financial assets that can be readily accessed and used to buy goods and services. Two important components of the money stock: Currency: is the paper bills and coins in the hands of the public Demand deposits are balances in bank accounts that depositors can access n demand by writing a check. The Bank of Canada Serves as the nation’s central bank. It is designated to control the quantity of money in the economy. The BofC was established in 1935 and is owned by the Canadian Government.
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The structure of the BofC: managed by a board of directors, composed of the governor, the senior deputy governor, and 12 directors, including the minister of Finance. The Current governor, David Dodge, was appointed in 2001 (next will be Mark Carney) All members of the board of directors are appointed by the minister of Finance, with 7-year terms for the governor and senior deputy governor and 3 year terms for the other directors. Acts quite independently from the Canadian government. Role of the BofC 1. Issue currency (print money) 2. Act as banker to the commercial banks (BofC will lend money to commercial banks if they are short) 3. Acts as a banker to the Canadian government (buy and sell government bonds) 4. Control the money supply (does that when it plays the 3 previous roles) Commercial Banks and the Money Supply Commercial banks include credit unions, caisses populaires, trust companies, and regular banks. Commercial banks can influence the money supply in the economy through the amounts they loan and the amount they keep as reserves (deposits that banks received but have not loaned out) Banks usually keep some reserves so that currency is available if depositors want to make withdrawals.
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