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Chapter Fourteen

Chapter Fourteen. Money and the Financial System. The Three Functions of Money. Medium of Accepted as payment for Exchange products and resources Unit of Single standard for assigning measurement and comparing values of products and resources

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Chapter Fourteen

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  1. Chapter Fourteen Money andthe Financial System

  2. The Three Functionsof Money Medium of Accepted as payment forExchange products and resources Unit of Single standard for assigning measurement and comparing values of products and resources Store of Means of retaining and value accumulating wealth 14-1

  3. The Six Characteristicsof Money • Acceptability • Divisibility • Portability • Stability • Durability • Difficulty to counterfeit 14-2

  4. 46% 18-29 40% 30-44 45-64 56% 71% 65-over Penny Pinchers A penny saved is… Those who alwaystake penniesin change 14-3 While 67% of adults say the government should continue makingpennies, 51% sometimes leave theirs at the store. Source: http://www.usatoday.com/snapshot/news/nsnap062.htm

  5. Near Money • Savings account • Money market account • Guaranteed investment certificates • Credit card • Debit card • Traveler’s cheque • Money order • Cashier’s cheque 14-4

  6. Credit Card Bill Paying With Income of$50,000-$100,000 AllHouseholds Pay all each month 44% 40% Never pay off 36% 45% Pay some monthly 21% 15% 14-5 Source: “A New Financial Health Barometer,”Business Week, November 30, 1998, p. 8.

  7. Credit Cards Marketed on the Internet • More than 15 million people searched the Internet for a new credit card within the last three years. • Nearly 6 million people completed online card applications within the last two years. • NextCard markets its credit card solely on the Web and receives between 80,000 and 100,000 applications per month 14-6 Source: Tom Maguire, “Click Here and Charge,”American Demographics, January 1999.

  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. 14-7 • Became a crown corporation in 1938 with all shares now held by the Minister of Finance.

  9. The Responsibilities of thethe Bank of Canada • To control the money supply using monetary policy • To provide central banking services • To be the sole issuer of currency • To administer the public debt • To oversee the administration of the clearing and settlement systems 14-8

  10. The Tools of Monetary Policy 1. Open market operations 2. Influence on the overnight rate 3. Cash management activities 14-9

  11. Central Banking Services • One-day sale and repurchase transactions • Acting as the federal government’s banker • Intervention in the foreign exchange market as agent of the Minister of Finance • Management of the governments foreign exchange reserves • Maintenance of deposit and safekeeping accounts for Canadian financial institutions and other central banks 14-10a

  12. The Issuance of Currency The Bank of Canada is: • The sole issuer of Canadian bank notes • Is responsible for ensuring the authenticity of all bank notes • Operates to ensure a sufficient supply of currency in the economy 14-10b

  13. Administration of the Public Debt The Bank of Canada: • Advises the federal government on borrowing • Manages new debt offerings • Services outstanding debt • Administers some 7 million CanadaSavings Bond holder accounts 14-10c

  14. The Canadian Payment Association • The CPA operates two major systems: • The Automated Clearing Settlement System (ACSS) • The Large Value Transfer System (LVTS) 14-11a

  15. How the System Works 14-11b Step 1: Payment by one of the many means available – cheque, debit card, direct deposit, and so on. Step 2: Clearing, the daily process by which CPA members exchange deposited payment items, and then determine net amounts owed each other Step 3: Settlement, the procedure by which CPA members use the funds on deposit at the Bank of Canada to fulfill their net obligations to all other members. Source: www.cdnpay.ca/eng/pud/Intro .to.CPA.ENG.htm

  16. BankingInstitutions: Chartered banks Trust companies Credit unions Caisses populaires Banking and Nonbanking Institutions 14-12

  17. NonbankingInstitutions: Insurance companies Pension funds Mutual funds Money market funds Brokerage firms Nonfinancial firms Finance companies Banking and Nonbanking Institutions 14-13

  18. $4,395 $3,097 $2,197 Per Capita Spendingon Insurance 14-14 Japan Switzerland U.S.A. Source: Swiss Reinsurance Co., http://www.usatoday.com/snapshot/money/msnap004.htm.

  19. ABM Use in Canada 14-15 There are bout 21,000 ABMs across Canada Canadians are relatively heavier users of ABMs than Americans Canadian carried out over 1.25 billion ABM transactions in 2000

  20. PC Banking • Estimates indicate that the number of North American households doing PC banking jumped from 4.8 million to more than 10 million by the end of 2001. • Two “musts” for successful online banking: 1. The service must be accessible via the Internet (as opposed to direct dial-up) 2. No online security issues 14-16 Source: http://www.demographics.com/publications/ad/99_ad/9902_ad/ad990205d.htm, March 15, 1999.

  21. Solve the Dilemma a. List the various types of Canadian financial institutions and the primary functions of each. b. What services of each financial institution is Hill’s new company likely to need? c. Which single financial institution is likely to best meet Hill’s small company’s needs now? Why? 14-17

  22. Explore Your Career Options In what areas of industries are economists likely to be asked to provide economic projections.? 14-18

  23. Additional Discussion Questions and Exercises 1. What is meant by a demand deposit? • Why have credit cards become a popular substitute for money? 3. What are the advantages of automated bank machines (ABMs) for customers? For banks? 14-19

  24. Chapter 14 Quiz 1. Most paper currency is lightweight; the weight of money applies to which characteristic of money? a. durability b. stability c. divisibility d. portability • The currency in circulation plus deposits in personal chequing accounts and current accounts is called: a. money supply. b. reserve requirement. c. M1. d. M2. 14-20a

  25. Chapter 14 Quiz 3. The Canada deposit Insurance Corporation insures deposits up to $60,000 at: a. chartered banks, trust companies and loan companies. b. only chartered banks. c. credit unions. d. credit unions and caisses populaires. • The bank of Canada seeks to protect the value of Canadian money by keeping inflation low and stable. It does this by controlling the supply of money through: a. high government taxes on banking institutions. b. issuance of currency. c. oversight of the payments and clearing system. d. monetary policy. 14-20b

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