CHAPTER 14 MONEY AND BANKING CHAPTER SYNOPSIS Do you remember your first summer job? Whether it was babysitting, delivering papers, or mowing lawns, think of how long it took to save just a few dollars. And most of us learned just how valuable those few dollars were once they were spent on something. Money is one topic with which we are all familiar. This chapter describes the different forms that money takes in the nation’s money supply and discusses the different types of financial institutions that make up the Canadian financial system. It also looks at how financial institutions create money and describes the means by which they are regulated. The functions of the Bank of Canada are discussed, as are the tools that it uses to control the money supply. A supplement at the end of Chapter 14 provides useful information on how to manage your personal finances. CHAPTER OUTLINE I.
WHAT IS MONEY? A. The Characteristics of Money—Although usually thought of as paper or coinage issued and authorized by a government, money is actually any object generally accepted by people as payment for goods and services. Desirable characteristics of money include portability (should be lightweight and easy to handle), divisibility (should be easily divisible into smaller parts with fixed value for each unit), durability (should not spoil, and even when it eventually wears out, it can be replaced), and stability (the value does not fluctuate drastically). B. The Functions of Money—Money serves three functions: as a medium of exchange, as a store of value, and as a unit of account. C. The Spendable Money Supply: M-1—Measuring the supply of money is difficult and there is little agreement on how it should be measured. M-1 is the "narrow" definition of the money supply and includes only the most liquid forms of money (i.e., currency, and demand deposits). D. M-1 Plus the Convertible Money Supply: M-2—This broader definition of the money supply includes everything in M-1 plus items that cannot be spent directly but that are easily converted to spendable forms: time deposits, money market mutual funds, and savings deposits. E. Credit Cards and Debit Cards: Plastic Money?—Spending with a credit card creates a debt, but does not move money until later when the debt is paid by . 477
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