explain the difference between currency and bank money. which institutions in canada are responsible for producing these two types of money? explain fully.
Explain the difference between currency and bank money. Which institutions in Canada are responsible for producing these two types of money? Explain fully.
Answer:
Currency and bank money are both forms of money used in an economy, but they have distinct characteristics and origins.
1. Currency:
Currency refers to physical cash in the form of coins and banknotes issued by the central bank of a country. In Canada, the central bank responsible for issuing currency is the Bank of Canada. Canadian currency includes coins, such as the Canadian dollar coins (loonies and toonies), and banknotes, such as the $5, $10, $20, $50, and $100 bills. These physical forms of money are widely used for transactions in everyday life, facilitating the exchange of goods and services.
2. Bank Money:
Bank money, also known as commercial bank money or deposit money, refers to the money held in checking accounts and savings accounts at commercial banks. When individuals or businesses deposit money into their bank accounts, they are essentially entrusting their funds to the bank, which then becomes responsible for maintaining and safeguarding those funds. In return, the bank issues digital records of the deposited amounts, which can be accessed and used for transactions through various means such as checks, debit cards, and online banking. Unlike currency, which is physical, bank money exists as electronic entries in the banking system.
Difference Between Currency and Bank Money:
The primary difference between currency and bank money lies in their form and issuer. Currency is issued by the central bank and exists in physical form, whereas bank money exists as electronic records held by commercial banks. While both forms of money serve as mediums of exchange, currency is more tangible and widely accepted for transactions in the economy, while bank money primarily facilitates digital transactions and payments.
Institutions Responsible for Producing Money in Canada:
In Canada, the two main institutions responsible for producing money are:
a. Bank of Canada: As the country’s central bank, the Bank of Canada is responsible for issuing and regulating currency. It ensures that an adequate supply of physical cash is available to meet the demands of the economy and maintains the stability of the Canadian dollar.
b. Commercial Banks: Commercial banks, such as Royal Bank of Canada (RBC), Toronto-Dominion Bank (TD Bank), and Bank of Montreal (BMO), are responsible for creating and managing bank money. When customers deposit funds into their accounts, commercial banks can lend a portion of those funds out to borrowers while still maintaining the ability to honor withdrawal requests. This process, known as fractional reserve banking, allows commercial banks to expand the money supply by creating new bank money through loans and credit.
In summary, while currency is issued by the central bank and exists in physical form, bank money is created by commercial banks as electronic records of deposits. Both forms of money play crucial roles in facilitating economic transactions, with the Bank of Canada overseeing the issuance of currency and commercial banks managing bank money through lending and deposit-taking activities.