Chapter 14 Flashcards
Define money
Object accepted as payment for g/s
What are the 4 characteristics of money
- Portable: lightweight, easy to handle
- Divisible: easily broken down to match value of goods
- Durable: cannot wear out
- Stable: stable enough to hold value over time with minor fluctuations
What are the 3 functions of money
- Exchange medium: used to trade g/s instead of bartering
- Value storage: useable for future purchases
- Account unit: measure relative value of g/s
Define the spendable money supply
Buyers/sellers agree on value of money, which then fluctuates based on value/circulation
Define the M-1 money supply
“Narrow” liquid money
1. Currency from Bank of Canada
2. Demand deposits (chequings)
3. Cheques
Define the M-2 money supply
All M-1 PLUS items convertible to spendable form
1. Time deposits (requires notice before withdrawal)
2. Mutual funds: pooled assets from investors
3. Savings account holdings
Is credit card money?
No, substitutes, works as temporary medium exchange
What are the 5 Canadian financial pillars
Chartered banks
Alternate banks
Life insurance companies
Specialized lending/saving intermediaries
Investment dealers
Do the 4 financial pillars still exist as distinct entities
No, lines now blurred due to changes in financial industry regulations
Define a chartered bank
Privately owned
Profit-oriented
Accept deposits from customer to lend to another
Offer: chequings, savings, loans, etc
What are the 2 types of chartered banks
Schedule 1: domestic, no more than 10% voting owned by one person
Schedule 2: not always domestic, does not respect 10% rule
What are services offered by banks
Pension
Trust
International
Financial
Electronic funds transfers
Bank loans
Define a bank loan + 3 types
Major source of short-term financing
1. Secured
2. Unsecured
3. Prime rate of interest
Do banks enjoy giving long term loans
No, would rather finance inventory/accounts receivable
How does the chartered banking system CREATE money
Not by minting bills and coins, but by taking cash from one customer’s chequings and lending it to others temporarily
What are changes happening in the financial system
- Deregulation: banks shifting from historical role as intermediaries between borrowers and depositors
- Changes in consumer demands (ie tangerine online bank instead of scotia physical)
- Changes in international banking
- Diversifying to other products (insurance, investment banking)
Define the Central Bank of Canada
- Governor board
- Regulations operations of chartered banks
- Manages money supply by
- Buying/selling securities
- Changing bank rate
- Managing bank rate (rate at which chartereds can borrow from B o C)
Define a trust company
Safeguards funds/estates entrusted to them
Define credit unions (caisse populaire)
Coop savings/lending institution formed by group of indiv with common interests (ie Desjardins)
What are 5 specialized lending/savings intermediaries
- Life insurance companies
- Factoring
- Financial corps
- Venture capital/dev firms
- Pension funds
Define a life insurance company
Shares risk with policy holders for payment of premium; some money is lent out; substantial investment in real estate, mortgages, govt bonds
Define a factoring company
Buys uncollected accounts receivables from firm for less than face value; allows firm to redeem at least some value; pays less and attempts to collect face value
What are the 2 types of financial corporations
Sales finance company
Consumer finance company
Define a sales finance company
Finances installement purchases made by indivs for a business; loans are SECURED by items being financed
Define a consumer finance company
Makes personal loans to consumers; collateral may be required
Define a venture capital firm
Funds new/expanding firms with great potential; obtains funds from investors, financial intermediates, retained earnings; seeks to earn higher than normal returns for high risk
Define a pension fund
Accumulates cash that will be paid out in future as pension income; money invested till needed; stocks, bonds, mortgages, etc
Define an investment dealer
Stockbroker, underwriter act as primary distributor of new stock/bond issues
What are other sources of funds in Canada
Business Dev Bank of Canada (BDC)
Export Dev Corp (EDC)
Canada Mortgage and Housing Corp (CMHC)
How do exchange rates influence international trade
Influence willingness to invest/import: ex if CAD is strong, exports become more expensive where as imports become less expensive
Define the Law of One Price
Identical product should sell for same price in all countries
Define the Big Mac Currency Index
Over vs undervalued currencies
Define the international payments process
- Local bank converts payments to currency required by foreign trade associates
- Bank then sends foreign currency payment to foreign trade partner
- Partner deposits payment in his own foreign bank
Define the international bank structure
International banking governed by network of loose agreements between countires
What is the World Bank
UN agency funds infrastructure projects in developing countries
What is the International Money Fund
Collects money from member nations and lends to others
