After reading this chapter, you will be able to: 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;...
Chapter Fifteen Money and the Financial System © 2003 McGrawHill Ryerson Limited The Three Functions of Money 15-1 Medium of Accepted as payment for Exchange products and resources Unit of Single standard for assigning measurement and comparing values of products and resources Store of value Means of retaining and accumulating wealth © 2003 McGrawHill Ryerson Limited The Six Characteristics of Money 15-2 • • • • • • Acceptability Divisibility Portability Stability Durability Difficulty to counterfeit © 2003 McGrawHill Ryerson Limited Penny Pinchers 15-3 1829 3044 4564 65over 46% A penny saved is… Those who always take pennies in change 40% 56% 71% While 67% of adults say the government should continue making pennies, 51% sometimes leave theirs at the store â2003McGrawưHillRyersonLimited Source:http://www.usatoday.com/snapshot/ news/nsnap062.htm NearMoney 15-5 • • • • • • Savings account Money market account Guaranteed investment certificates Credit card Debit card Traveler’s cheque Money order Cashier’s cheque © 2003 McGrawHill Ryerson Limited Credit Card Bill Paying All Households 15-6 With Income of $50,000 $100,000 Pay all each month 44% 40% Never pay off 36% 45% Pay some monthly 21% 15% © 2003 McGrawHill Ryerson Limited Source: “A New Financial Health Barometer,” Business Week, November 30, 1998, p. 8 Credit Cards Marketed on the Internet 15-7 • 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 â2003McGrawưHillRyersonLimited Source:TomMaguire,ClickHereandCharge, AmericanDemographics,January1999 TheBankofCanada 15-8 Foundedin1934toregulatecreditpolicyand currencyinthebestinterestsoftheeconomiclifeof thenation • Became a crown corporation in 1938 with all shares now held by the Minister of Finance © 2003 McGrawHill Ryerson Limited The Responsibilities of the the Bank of Canada 15-9 • 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 © 2003 McGrawHill Ryerson Limited The Tools of Monetary Policy 15-10 Open market operations Influence on the overnight rate Cash management activities © 2003 McGrawHill Ryerson Limited Central Banking Services 15-11a Oneday 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 â2003McGrawưHillRyersonLimited TheIssuanceofCurrency 15-11b TheBankofCanadais: ThesoleissuerofCanadianbanknotes Isresponsibleforensuringtheauthenticityofallbank notes Operatestoensureasufficientsupplyofcurrencyinthe economy â2003McGrawưHillRyersonLimited AdministrationofthePublic Debt 15-11c The Bank of Canada: • Advises the federal government on borrowing • Manages new debt offerings • Services outstanding debt • Administers some 7 million Canada Savings Bond holder accounts â2003McGrawưHillRyersonLimited TheCanadianPayment Association 15-12a TheCPAoperatestwomajorsystems: TheAutomatedClearingSettlementSystem (ACSS) TheLargeValueTransferSystem(LVTS) © 2003 McGrawHill Ryerson Limited How the System Works 1512b 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 © 2003 McGrawHill Ryerson Limited Source: www.cdnpay.ca/eng/pud/Intro to.CPA.ENG.htm Banking and Nonbanking Institutions 15-13a Banking Institutions: â2003McGrawưHillRyersonLimited Charteredbanks Trust companies Credit unions Caisses populaires Banking and Nonbanking Institutions 15-13b Nonbanking Institutions: © 2003 McGrawHill Ryerson Limited • • • • • • • Insurance companies Pension funds Mutual funds Money market funds Brokerage firms Nonfinancial firms Finance companies Per Capita Spending on Insurance 15-14 $4,395 $3,097 Japan Switzerland © 2003 McGrawHill Ryerson Limited $2,197 U.S.A Source: Swiss Reinsurance Co., http://www.usatoday.com/ snapshot/money/msnap004.htm ABM Use in Canada 15ư15 Therearebout21,000ABMsacross Canada Canadiansarerelativelyheavierusersof ABMsthanAmericans Canadiancarriedoutover1.25billion ABMtransactionsin2000 â2003McGrawưHillRyersonLimited PC Banking 15-16 • 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 dialup) 2 No online security issues © 2003 McGrawHill Ryerson Limited Source: http://www.demographics.com/publications/ad/99_ad/ 9902_ad/ad990205d.htm, March 15, 1999 Solve the Dilemma 15-17 a b c List the various types of Canadian financial institutions and the primary functions of each What services of each financial institution is Hill’s new company likely to need? Which single financial institution is likely to best meet Hill’s small company’s needs now? © 2003 McGrawHill Ryerson Limited Explore Your Career Options 15-18 In what areas of industries are economists likely to be asked to provide economic projections.? © 2003 McGrawHill Ryerson Limited Additional Discussion Questions and Exercises 15-19 1. What is meant by a demand deposit? Why have credit cards become a popular substitute for money? What are the advantages of automated bank machines (ABMs) for customers? For banks? © 2003 McGrawHill Ryerson Limited Chapter 15 Quiz 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 15-20a © 2003 McGrawHill Ryerson Limited Chapter 15 Quiz 15-20b 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 © 2003 McGrawHill Ryerson Limited ... Administerssome7millionCanadaSavingsBond holderaccounts â2003McGrawưHillRyersonLimited TheCanadianPayment Association 1 5-1 2a TheCPAoperatestwomajorsystems: The Automated Clearing Settlement System (ACSS) The Large Value Transfer System (LVTS)... Source: Swiss Reinsurance Co., http://www.usatoday.com/ snapshot /money/ msnap004.htm ABM Use in Canada 1515 • There are bout 21,000 ABMs across Canada •Canadians are relatively heavier users of ABMs than Americans •Canadian carried out over 1.25 billion ... Management of the governments foreign exchange reserves Maintenance of deposit and safekeeping accounts for Canadian financial institutions and other central banks © 2003 McGrawHill Ryerson Limited The Issuance of Currency 1 5-1 1b