Ch. 12: Money & Banking
Gr. 11 Economics
(CIE3M1)
M. Nicholson
MONEY



Money is anything that people are willing to
accept as payment for goods & services
In the past cows, stones, beads, beaver pelts
and playing cards have functioned as money
Canadian dollars are legal tender in Canada
whereas credit cards and Canadian Tire bills
do not have to be accepted as payment
MONEY


Cheque - order to pay an individual a specific
amount of money from demand deposit or
chequing account
Money supply (M1) = Currency + Chequing
MONEY
BARTER

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One good or service must be exchanged for
another good or service
Problem of double coincidence of wants arises
which wastes a lot of time
Problem of indivisibility of bartered goods and
services also arises
Money solves both of these problems
USES OF MONEY

1.
2.
3.
4.
5.
Medium of exchange
Generally acceptable
Portable
Divisible
Unique
Uniform in value – value evident
USES OF MONEY

Measure of Value
–

compare prices
Store of Value
–
does not rot or spoil
BANKING


Chartered banks have a federal charter (e.g.
Royal, CIBC, Montreal, TD Canada Trust,
Nova Scotia)
Schedule 1 banks are the five largest banks in
Canada and have immense financial power
with over 95% of M1 (most an individual can
own is 10%)
BANKING


Schedule 2 banks are subsidiaries of foreign
banks and have little impact on the Canadian
economy
Branch banking in Canada vs. unit banking in
USA
BANK OF CANADA




Central bank of Canada founded in 1935 is
now a Crown corporation
The bank of the banks supplies Canada with
currency
Federal government uses B of C to manage its
financial affairs (e.g. bonds)
Main function is controlling the money supply
to meet the needs of the Canadian economy
OTHER FINANCIAL INSTITUTIONS


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Trust companies
Mortgage companies
Credit unions and caisses populaires
MONEY CREATION



loans by the banks of customer’s deposits
creates money
Cash-reserve requirements or fractional
reserves determine how much the money
supply can be increased based on the amount
of the deposits
The banks only need enough money for the
daily needs of customers and can lend out the
rest to earn interest and profits for the bank
REGULATION OF THE MONEY
SUPPLY



Open market operations are the buying and
selling of federal government bonds by B of C
Expansion of the money supply  B of C buys
CSBs (Canada Savings Bonds)
Contraction of the money supply  B of C sells
CSBs
REGULATION OF THE MONEY
SUPPLY
REGULATION OF THE MONEY
SUPPLY


Changes in the bank rate or lending rate to
banks influences the prime lending rate to the
banks’ best customers
Moral suasion  used by the Gov. of the B of
C (Poloz) to influence lending policies at banks