MONEY & BANKING (M2)

Mid Term Examination

SUBMITTED TO: PROF AQSA SIDDUQI

SUBMITTED BY: SYED MUHAMMAD ZARGHAM ALI (2183184)
 PART A: IMAGE BASED CONCEPT RECOGNITION QUESTIONS

Q1: Is the process of exchange possible among these three people? If not, what is the major
problem which is hindering the exchange process? Please identify and explain.
ANSWER:
No, the exchange is not possible because requirements do not match. Double coincided of wants
isn’t exist between them as we know for this process to occur between two parties, both parties
need to have what the other wants.
This is the problem of ‘double coincidence of wants’ that both parties should need that thing
which the other party is willing to sell.

Q2: In the following; images of Dollar, Pound and Euro are given? These currencies
represent which kind of money? Please identify and briefly explain that type of money?

ANSWER:

These are “Paper money (Fiat money currency)”

Fiat money is government-issued currency that is not backed by a physical commodity, such as
gold or silver, but rather by the government that issued it. The value of fiat money is derived
from the relationship between supply and demand and the stability of the issuing government,
rather than the worth of a commodity backing it as is the case for commodity money
 Fiat money gives central banks greater control over the economy because they can
control how much money is printed.
 Most modern paper currencies, such as the U.S. dollar, are fiat currencies.

Q3: Which type of ‘instrument of money’ is represented in the following image? Please
identify and explain briefly.
ANSWER:

The instrument of money is represented in the following image is “Bill of Exchange”

A bill of exchange is a written order used primarily in international trade that binds one party to
pay a fixed sum of money to another party on demand or at a predetermined date. Bills of
exchange are similar to checks and promissory notes—they can be drawn by individuals or banks
and are generally transferable by endorsements.

Q4: Please identify and name the downward sloping curve, which is shown in the following
image?

ANSWER:
The name of the downward sloping curve is “Money demand curve”

Q5: To which theory this proverb relates in ‘Money Literature”? please identify and
explain that theory?

ANSWER:

Asset demand (Portfolio Theory)

People hold their financial assets i.e. store their wealth in various forms. They may buy shares of
a company or a govt. bond. One form in which they keep wealth is money form. But since idle
money earns no interest, if they are offered good rate of interest, they reduce their demand for
money as asset and lend some amount. In this way rate of interest has a negative relation with
money demand.

PART B: SCENARIO BASED QUESTIONS

Scenario 1

Ms. Tania & Ms. Neelum are childhood pals. They had grown up together by living in
neighborhoods. Ms. Tania got settled in Malaysia after marriage; while Ms. Neelum remained in
Pakistan and started a handmade jewelry business from home. Ms. Tania also started an online
women’s store where she sells women accessories by importing those items from China and
Pakistan. She also purchases these handmade jewelries from her friend Mr. Neelum. Their
transaction was not based on cash, rather it was based on credit, for most of the times. Whenever
Ms. Tania buys these classic handmade jewelries from Ms. Neelum, she just uses a written
promise to make a cash payment whenever Ms. Neelum shows this written order to Ms. Tania.
But this promissory note and the written fixed amount of cash payment can only be claimed on a
pre-specified date and time, before that it couldn’t be used to get cash payment, in another
country.
Q6: Which instrument of money is being used between Ms. Tania and Ms. Neelum, for the
payment of goods bought and sold between the two? Please identify the type of instrument
and briefly explain with example (3 MARKS)

ANSWER:

Bill of exchange (Time bill) instrument is being used between Ms Tania and Ms neelum for the
payment of goods

A bill of exchange is issued by the creditor and orders a debtor to pay a particular amount within
a given period of time. The promissory note, on the other hand, is issued by the debtor and is a
promise to pay a particular amount of money in a given period.
For example, X orders Y to pay ₹ 50,000 for 90 days after date and Y accepts this order by
signing his name, then it will be a bill of exchange

Scenario 2
Mr. Saad works as a labor, in a textile company, in Faisalabad. Once he was working on dyeing
plant, that fumes of chemicals affected his nerves so strongly that he got unconscious and fell
down. He was taken to the hospital in emergency, where he was given an immediate treatment
and he got fine. His hospital bills were paid by his colleague Mr. Amir, on that day. When Mr.
Saad rejoined the work after 1 week of sick leave, Mr. Amir came to him and asked for the
money he paid as bill for him, as Mr. Amir was in urgent need of money. On the other hand, Mr.
Saad was neither having enough money with him at that time nor any of his friend had it, but its
needs to be repaid urgently. So, he decided to borrow money from bank for 6 hours, to pay the
debt of Mr. Amir as soon as possible, as he had an emergency issue at home and needed money
back. Hence, Mr. Saad went to a bank and borrowed a loan for a quite short period of time, i.e., 6
hours, meaning that he promised to return the borrowed money within same day as he had that
money in cash at home, but his home was far away, that is why to fulfil urgent need of money of
Mr. Amir, he had to borrow from bank to get money in cash, so he can fulfill Mr. Amir’s need of
urgent cash requirement. Bank granted him a short-term loan for 6 hours, and also issued an
instrument for this borrowed money for short term time period.

Q7: Please identify and briefly define, in which kind of financial markets, such temporary
and short-term shortage of funds is processed? Also identify and define the instrument
used by banks or any financial authority for this purpose of granting loans for a quite short
time period?
ANSWER:
The financial market such temporary and short-term shortage of funds is processed is “Money
Market” The money market enables economic units to manage their liquidity positions through
lending and borrowing short-term loans, generally under 1 year. It facilitates the interaction
between individuals and institutions with temporary surpluses of funds and their counterparts
who are experiencing a temporary shortage of funds.
The instrument used in this scenario is The interbank call money market is a short-term money
market which allows for large financial institutions, such as banks, mutual funds, and
corporations, to borrow and lend money at interbank rates, the rate of interest that banks charge
when they borrow funds from each other. The loans in the call money market are very short,
usually lasting no longer than a week, and are often used to help banks meet reserve
requirements.
Scenario 3:
Suppose, there is a village in remote area of Baluchistan, where people transact their exchange
through commodities. Let’s assume this village has only three goods, i.e., oranges, math
teaching, and entertainment. If this village uses commodity money as in Barter system, then we
all need to know only three prices to tell us how to exchange one for another: the price of
oranges in terms of math teaching (that is, how much math teaching you have to perform, to pay
for an orange), the price of oranges in terms of entertainment, and the price of math teaching in
terms of entertainment. If there were 10 goods, we would need to know 45 prices to exchange
one good for another; with 100 goods, we would need 4,950 prices; and with 1,000 goods,
499,500 prices.

Q8: In this system of exchange, if we have 10, 000 products, what will be the problem?
Please identify the problem and also suggest the solution, i.e., what can be introduced in
that village to resolve this problem? Please explain the solution with logics that how the
suggested solution will benefit villagers in their exchange process?

ANSWER:
As we know in barter system there’s no fixed ratio/amount so the problem would be “unit of
account”
However, the solution to the problem is to introduce money into the economy and have all prices
quoted in terms of units of that money As we know we can easily measure the value of goods
and services in terms of money, just as we measure weight in terms of pounds or distance in
terms of miles so.