Chapter 14

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Chapter 14 Powered By Docstoc
					Money and the Financial
System


Business 1000
Introduction to Business
Learning Objectives

•   Define money, its functions, and its characteristics.

•   Describe various types of money.

•   Specify how the Bank of Canada manages the money supply and regulates the
    Canadian banking system.

•   Compare and contrast banks, trust companies, and credit unions/caisses populaires.

•   Distinguish among nonbanking institutions such as insurance companies, pension
    funds, mutual funds, and finance companies.

•   Investigate the challenges ahead for the banking industry.

•   Recommend the most appropriate financial institution for a hypothetical small
    business.



Chapter 14: Money and the Financial System                                               2
Three Functions of Money


• Medium of Exchange


• Unit of Measurement


• Store of Value



Chapter 14: Money and the Financial System   3
Six Characteristics of Money

• Acceptability                              • Stability




• Divisibility                               • Durability




• Portability                                • Difficulty to
                                               Counterfeit

Chapter 14: Money and the Financial System                     4
The Money Supply

• Buyers and sellers must agree on the
  value of money


• The value of money is dependent on its
  supply
      – As supply increases, value decreases
      – As supply decreases, value increases


• Consists of both M-1 and M-2 forms of
  money

Chapter 14: Money and the Financial System     5
M-1 Money Supply


• The most liquid forms of money
      – Currency: paper money and coins issued by the
        Canadian government


      – Demand deposits: money in chequing accounts,
        which can be transferred to others by cheque




Chapter 14: Money and the Financial System              6
M-2 Money Supply

• Everything in the M-1 Money Supply, plus:
      – Savings deposits: savings account holdings


      – Time deposits: deposit requiring prior notice
        before withdrawal of funds


      – Money market mutual fund investments: funds
        operated by investment companies that pool
        together the money from many investors

Chapter 14: Money and the Financial System              7
Near Money

• Liquid assets that are not a direct medium of
  exchange
      – Savings account
      – Guaranteed investment certificates
      – Credit card
      – Debit card
      – Traveler’s cheque
      – Money order
      – Cashier’s cheque


Chapter 14: Money and the Financial System        8
The Bank of Canada

• Founded in 1934 to regulate “credit policy and currency
  in the best interests of the economic life of the nation.”

• Became a crown corporation in 1938 with all shares now
  held by the Minister of Finance

• Responsible for
      –   monetary policy
      –   central banking services
      –   Currency
      –   administration of public debt



Chapter 14: Money and the Financial System                     9
Banking Institutions

• Chartered banks


• Trust companies


• Credit unions


• Caisses populaires

Chapter 14: Money and the Financial System   10
Nonbanking Institutions

• Insurance companies
• Pension funds
• Mutual funds
• Money market funds
• Brokerage firms
• Nonfinancial firms
• Finance companies



Chapter 14: Money and the Financial System   11

				
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posted:10/16/2011
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