Accepted and Secure
Portable and Divisible (coins and bills for easy to distribute)
Durable
Controlled (by a monetary authority)
ECONOMIC FUNCTIONS OF MONEY:
Medium of exchange
-Any item that is used to effect a purchase or a sale.
Double coincidence of wants- a situation in which a buyer finds a seller who has what the buyer wants and wants what the buyer has. ( a person who has wheat and wants to exchange it for shoes must find someone who has shoes and wants wheat in exchange.
Unit of account of measure of value – the common unit for expressing the value of goods and services.
Store of value or store of wealth- money or other assets put away for future use.
Liquidity- the ease with which an asset can be converted into cash with minimum loss.
Kinds of money: 1) COINS,
2) NOTES,
3) CHEQUING ACCOUNTS.
Currency or hand-to-hand money – the notes and coins that serve as a country’s medium of exchange.
Token money - money whose face value exceeds its commodity value.
Fiat money- legal tender money that is not backed by gold or any other precious metal.
Legal tender- money that must legally be accepted if offered as payment to settle debt.
Good money- money whose face value equals its commodity value.
Bad money – money whose face value exceeds its commodity value.
Gresham’s law- the hypothesis that bad money will drive good money out of circulation.
Chequing accounts –bank deposits that are transferable by cheques.
Demand deposits- bank deposits that can be withdrawn without prior notice.
Notice deposits- interest earning deposits subject to notice before withdrawal.
Near money- highly liquid assets that can be easily converted into currency or demand deposits without any appreciable loss of value.
M1- currency in circulation plus personal chequing accounts and current accounts at charactered banks.
M2- M1 plus personal saving accounts and other chequing accounts, terms deposits, and non-personal notice deposits.
M2+ = M2 plus deposits at non-bank deposits-taking institutions.
M2++= M2+ along with mutual funds and CANADA SAVING BONDS.
M3= M2 plus chartered bank non-personal term plus foreigh currency deposits of residents.
CH14
The Canadian Banking System
Objectives and Functionas of the Bank of Canada
Fractional reserve banking system
-Target reserve ration
-Desired reserves
Primary and secondary reserves
The Creation of Money
-Excess reserves
-Money multiplier
Banking System- the association of the central bank and the chartered banks as part of a larger financial networks.
FINANCIAL SYSTEM:
1)The Bank of Canada
2)Chartered banks
3) Near banks
4) Other financial institutions.
THE FINANCIAL SYSTEM CONSISTS OF BANKS AND OTHER FINANCIAL INSTITUTIONS THAT PROVIDE A VARIETY OF FINANCIAL SERVICES TO THEIR CUSTOMERS.
Near banks- financial institutions other than banks that accept deposits from the public. ( caisses populaires, credit union, trust companies, mortgage loan companies)
FIVE FUNCTIONS OF THE BANK OF CANADA: OBJECTIVES
Controller of the money supply
If the money supply increases too rapidly, the AD curve shifts up and to the right, resulting in price level increases- INFLATION RESULT.
Banker to the commercial banks
All Canadian chartered banks have an account at the Bank of Canada where they keep a fraction of their deposits as desired cash reserves.
Fiscal agent and financial adviser to the government
Manager of the country’s monetary policy
Core CPI- refers to an adjustied version of total CPI ecluding the most volatile components including seasonal produce like fruit and vegetables, gasoline, oil, natural gas, mortgage interst.
Core inflation- a measure of inflation using the core CPI
Supporter of the financial system
Fiduciary monetary system- monetary system based on trust of confidence.
Brach banking system- a banking system based on relatively few banks with many branches,
Bank Act- federal legislation that governs the operations of chartered banks.
Interest spread- the difference between the interest that banks charge for loans and the interest rate they pay their depositors.
THE ASSETS OF CHARTERED BANK: notes and deposits with the BOCANADA, foreign currency deposits, cheques, loans, and mortgages.
THE LIABILITIES OF CHARTERED BANK: deposits, advances from the bank of canada, acceptances, guarantees, letters of credit and shareholders' equity.
Fractional reserve banking- a banking system in which banks keep only a fractiona of their deposits in cash reserves.
Target reserve ratio- the fraction of demand deposits that chartered banks hold as cash reserves.
Desired reserves- the minimum amount of reserves that banks desire to hold.
Primary reserves- bank reserves held in cash.
Secondary reserves- liquid assets, such as currency, day-to-day loans, treasury bills, and call and short loans, held as reserves.
Initial deposit of primary deposit- a deposit that a deposit-taking institution sells for cash.
Excess reserves- cash reserves held in excess of the desired cash reserves.
Derivative deposit or secondary deposit- a deposit that is created by a bank when it extends a loan.
Deposit expansion multiplier or money multiplier- the number by which an initial bank deposit is multiplied to arrive at the resulting total deposits. MM= 1/rr.
MM(money multiplier)
Rr( reserve ratio)
Caisses popularities and credit unions obtain most of their funds from customers’ deposits.
Caisses popularities and credit unions use their funds mainly for mortgage lending and cash loans.
Term deposits constitute the main sources of funds for trust and mortgage loan companies.
Most of the funds of trust and mortgage loan companies are used for mortgage lending.
Ch15
Keynesian Theory of money
-Transaction Demand
-Asset demand
-Liquidity preference curve