Money And Banking - Lesson 1 - Origins And Definitions Of Money

Front 1

What is fiat money? In Canada?
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Back 1

Money that is legal tender and that's certification rests upon a decree of government.

Typically, fiat money must be accepted for any services, damages or debts owed
In Canada the Currency Act (of Canada) declares the Canadian Dollar to be the unit of account and common reference point for Canadian transactions.

Front 2

What limits does the bank of canada imposse on its coinage?x
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Back 2

1 cent is legal tender to 25 cents.

5 cents is legal tender to five dollars

10 cents is legal tender to 10 dollars.

$0.25 and $0.50 pieces have legal tender standing up to ten dollars.

Front 3

What other laws of Canada contain legal sanctions for money beyond that issued by the Bank of Canada?
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Back 3

The Canadian Bank Act
Canadian Trust Act
Canadian Deposit Insurance Corporation Act; and the
Bank of Canada Act.

Front 4

What is fiduciary money?
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Back 4

Fiduciary money is deposit money issued by a private finanical institution that rests on the faith and credit that people place in the issuing institution. This money is not covered by legal tender provisions.

For example, a cheque.

Front 5

How do you define money, functionally? What purposes does it serve?
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Back 5

Money is anything that is acceptable as such. It should perform at least one of the following functions:

It is a unit of account.

It is a medium of Exchange.

It is a store of wealth or value.

it is a standard of deferred payments.

Front 6

What does it mean for money to be a unit of account?
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Back 6

As a unit of account money is assoicated with record keeping.

For example an inventory of goods can be recorded by physical count or in terms of a money value that arises by reference to the monetary unit that is accepted and the price of the goods.

Front 7

What does it mean for money to be a medium of exchange?
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Back 7

Money can be used to carry out transactions, and the recipient of the money is confident that the money can be passed on to someone else for other goods and services as desired.

This reduces the need to know the value of (for example) chickens and nails and everythign else in the barter economy, so that everything is accounted for in terms of a single common unit.

Front 8

What does it mean for money to be a store of wealth?
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Back 8

This means that money, while held, possesses potential purchasing power (even though the actual quantity of goods and services received for the stored money may change over time as price levels shift).

Because of inflation, people tend to convert money into an alternative form such as savings accounts, stocks, bonds, rental property etc.

Front 9

What costs are associated with alternative stores of wealth (ie. storing wealth in something other than money?)

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Back 9

Conversion costs

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Storage costs

Front 10

What does it mean for money to be a standard of deferred payments?
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Back 10

Money is used to express debt obligations and to allow for debt repayment. (An extention of the unit of account/medium of exchange/store of wealth)

Front 11

Explain Gresham's law.
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Back 11

"Bad money drives good money out of circulation" means that in a bimetallic economy (for example) when one coin is overvalued, and one is undervalued, rational individuals will choose not to overpay by choosing to pay with the overvalued coin (e.g. silver in most economies). This results in the gold being held and eventually withdrawn from circulation.

Front 12

What is the Price Specie Flow Mechanism (or system)?
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Back 12

The international aspect of having precious metal standards.

If a country runs a trade surplus (Exports greater than imports) than monetary metal will flow into the country based upon their international advantage in world markets.

Front 13

What is the statistical definition of money?
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Back 13

The statistical definition is devised for the purpose of serpating money on the basis of location within the financial system and liquidity.

In a modern economy, money is considered to exist in the form of coins, currency, demand deposits, time deposits, foreign currency deposits, as well aspersonal and non-personal fixed term deposits.

Front 14

What is Banker's Risk?
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Back 14

The risk of withdrawal of all deposits within a bank!

Front 15

What are demand deposits?
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Back 15

These are deposits that must be paid upon demand to the owner of the deposit. As a result the reserve is likely to be higher for this class of bank liabilities.

Front 16

WHat is a reserve?

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Back 16

The money than banks and their branches hold based on their past experiences and projections of expected withdrawals associated with a particular class of deposits.

Front 17

What is the Canadian Payment's Association?
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Back 17

The CPA was created in 1980 by parliament, to "establish and operate national systems for the clearing and settlement of payments and other arrangements for the making or exchange of payments" within Canada.

The CPA facilitates the flow of funds between institutions and mitigates risk to participants in the payment system.


They handle several transaction types including cheques, bills payments, and point-of-sale debits.

All banks operating in Canada as well as the Bank of Canada are required to be members. Other financial institutions such as credit unions, trust companies, life insurance companies, and securities dealers are eligible for membership.

Front 18

What is a near money item?
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Back 18

A near money item is usually one that is not directly spendable in its present form.

It must be transacted into a more liquid form.