What is the

Financial
Sector?
The Financial Sector is
the complex mix or
network of markets,
households, businesses,
governments, laws and
institutions interacting
with one another.
Let’s Think!
What role does the Financial Sector play in
an economy?
Functions of the Financial Sector

Redistributes from Savers to Lenders

Offers interest
Source of funds for G’ovt/private investors
Allows part ownership
Provides compensations
Anything which is generally accepted as payment for goods and services.

Money
 • Take out any notes or coins which you may
have. What similar characteristics do they
possess?
Exercise
• Enter your answer on menti.com using the
code 86 80 6
 Durable

Acceptable Portable

Characteristics Characteristics
of Money
Limited in
Divisible
Supply

Homogenous
 Medium
of
Exchange

Functions of Std of
deferred
Fns. Of Measure
Money payment Money of Value

Store of
Vaue
Group Work
Explain the different
functions of money
you noticed in the
video. Give
examples.
Review
1. At the grocery store last week, you purchased$93.25 worth of groceries. You paid
for the groceries in cash. You gave the cashier four $20 bills, a $10 bill, three $1
bills, and a quarter. What is the primary function of money exhibited here?
______________________________
2. At the grocery store last week, you had to decide whether to buy the 14.5 oz. can
of diced tomatoes for $1.75 or the 28 oz. can of diced tomatoes for $2.55. What
is the primary function of money exhibited here?
__________________________________

3. Last year, you sold your game system to your friend Jimmy for $125 in cash.
You’ve been saving that money in a shoebox under your bed. You are saving the
money to buy a new computer next year. What is the primary function of money
exhibited here? ______________

4. For Mother’s Day you borrowed $100 from your sister to buy your mother a gift.
You agree that you would pay her back $20 for the next 5 months. What is the
primary function of money exhibited here? ______________________________
Why do you demand money?
What are some things you can do with money?
Demand for Money
Transactionary

Precautionary

Speculative
Exercise!

• Amal keeps cash in her wallet so she can buy groceries

• Margie keeps extra cash under the mattress in case her
favorite store has a sale
• John keeps extra money in his wallet in case his minivan
needs an emergency repair
• Margie may hold some of her wealth in the form of
investments, such as bonds, that pay her interest.
• Sita keeps extra money in her purse when going to a party
in case her designated driver does not remain sober.
• Jane invests in the stock market.
So let's talk about motives for holding money. To understand the factors that determine Margie's demand for
money, it helps to know the four main motives she might have for holding money at any given time.
Firstly, Margie often holds money in the form of cash or checking accounts in order to buy goods and services.
Economists call this the transactions demand for money. For example, Margie keeps cash in her wallet so she
can buy groceries, something she does every week. The more cash she has in her wallet at any given time, the
less time she has to take to go to the bank, stand in line and withdraw more cash.
Secondly, she sometimes holds money as a safety net for unexpected expenses. Economists call that the
precautionary demand for money. When Margie keeps extra cash under the mattress in case her favorite
store has a sale or in case her minivan needs an emergency repair, she does this as a precaution.
Thirdly, Margie may hold some of her wealth in the form of investments, such as bonds, that pay her interest.
Economists call this the speculative demand for money. Since cash and most checking accounts don't pay
much interest, but bonds do, money demand varies negatively with interest rates. That means the demand for
money goes down when interest rates rise, and it goes up when interest rates fall. Just think about this example:
when the market interest rate rises from 4% to 8%, Margie can earn a high rate of return by holding her wealth
in bonds rather than money in the form of cash or checking accounts. So she decides to decrease her holdings
of money and buy more bonds with this money. The higher the interest rate is, the more of an incentive she has
to hold less of her wealth in the form of money. Economists describe it this way: Margie's opportunity cost of
holding money is the interest rate she could be earning by investing it into bonds instead.
Finally, Margie may hold some of her wealth in the form of money to balance out her portfolio of investments
and hedge the risk of losing money in the bonds or the other investments that she has, for example. This is
referred to as the portfolio demand for holding money.
So these four motives explain why Margie would want to hold some of her wealth in the form of money, and
they determine her demand for money.
Money Supply

The money supply represents the total stock of money

in an economy at any given time.
It is calculated as follows:
• 𝑀0 (monetary base) = cash and coins
• 𝑀1 (narrow money) = M0 + short term deposits
• 𝑀2 (broad money) = M1 + long term deposits
 Cash & 𝑀0
Coins

Short
Cash & 𝑀1
term
Coins
Deposits

Short Long
Cash & 𝑀2
term term
Coins
Deposits Deposits
2021
• Where does our money
come from?
• Who manages it?
The Central Bank
 • Visit CBTT and make a note of
how many different roles and
functions you can see.

Virtual Field • Note some of them at menti.com

Trip to the using the password 52 88 44
Central Bank!
 • Issues notes and coins

Role of the Central Bank

 Role of the Central
Bank

• Bank’s banker – all

commercial banks must
report to the Central Bank
and adhere to its guidelines.
They must also lodge a
percentage of their deposits
as cash reserves (reserve
requirement). On occasion
the Central Bank grants
loans to Commercial Banks
 Role of The Central
Bank

• Government’s bank –
deposit and make payments
for the government;
provides loans to the
government
Role of the
Central Bank

• Implements monetary policy – interest rate and money supply

Role of the
Central Bank

• Manages foreign exchange reserves

Role of the Central Bank

• Supervises non-banking financial institutions

What are some examples of non-banking
financial institutions in TT?
Role of the Central Bank
Bank’s banker – all commercial banks
must report to the Central Bank and
adhere to its guidelines. They must
Government’s bank – deposit and
also lodge a percentage of their
Issues notes and coins make payments for the government;
deposits as cash reserves (reserve
provides loans to the government.
requirement). On occasion the
Central Bank grants loans to
Commercial Banks

Implements monetary policy – Supervises non-banking financial

Manages foreign exchange reserves
interest rate and money supply institutions
Role of the Central Bank
 2008

• Explain TWO functions of the

Central Bank in your country. (4
marks)
Questions –
2010
Past Papers
• “The central bank is the lender of
last resort”. Discuss this statement
in relation to the central bank’s role
in managing the monetary sector in
the economy. (5 marks)
 The Central Bank is responsible for a country’s Monetary Policy.

Monetary Monetary Policy refers to the management of the economy

Policy through manipulation of the money supply and interest rates.

There are 2 types of Monetary Policy:

Contractionary Expansionary
 • The interest rate can be used to influence the level
of activity in an economy. As the interest rate goes
up, the cost of borrowing also increases. This means
that there would be less borrowing in the economy.
This leads to lower demand and investment which
means the economy would slow down.

• If the interest rate decreases, the cost of borrowing

decreases. People would be able to borrow more
and invest more thereby leading to increases in
economic activity.

Interest Rates
 Contractionary Monetary policy
occurs when the government
increases the interest rate and
Contractionary decreases the money supply.

Monetary
Policy
It is used to reduce levels of
inflation.
 • Interest rate – can be used
to increase/decrease
borrowing and investment

• Reserve requirement – the

amount or percentage of
deposits which must be
kept as cash reserves

• Open market operation –

buying and selling of
government securities

Weapons of Monetary Policy • Moral suasion –

persuading commercial
banks to adopt policies
How can the Central Bank influence the economy?
 • Reserve requirement is the amount
or percentage of deposits which
must be kept as cash reserves. For
example, if the RR is 10% and you
deposit $1000, the bank must keep
$100 in reserves and they can loan
out the other $900.

• As the RRR increases, there is less

money available for loans and
credit creation. This would slow
down the economy and decrease
the money supply.

• As the RRR decreases, there is more

money available for loans and
The Reserve Requirement credit creation. This would increase
economic activity and increase the
Ratio money supply.
Example
• Assume the RR is presently 20%. Jane deposits $5000 in the bank.
• How much money can the bank loan out?
• How much money must be lodged with the Central Bank?

• If the reserve requirement increases to 25%...

• How much money can the bank loan out?
• How much money must be lodged with the Central Bank?
• What type of Monetary Policy is this? Contractionary or Expansionary

• If the reserve requirement decreases to 10%...

• How much money can the bank loan out?
• How much money must be lodged with the Central Bank?
• What type of Monetary Policy is this? Contractionary or Expansionary
 • Open market operation refers to the
buying and selling of government
securities in the open market.

• If the government sells securities to

the public, there would be less
money in circulation (fall in the
money supply)

• If the government buys securities

there would be more money in
circulation (increase in the money
supply)

Open Market Operations

2021
Commercial Banks
Commercial
Banks
 • Accepts deposits from individuals
and firms
• Makes loans
• Safekeeping services
• Foreign currency services

Role of Commercial Banks

 Financial instruments are assets that
can be traded. It allows business and
individuals to participate in business
What is a activity such as lending and investing,
and decision making.
financial
instrument?
They are divided into debt securities
and equity securities. (page 122)
Financial Instruments
• Treasury notes (bills) and bonds – debt
securities issued by the government.
Treasury bills are short term loans usually
for 91 or 182 days. Treasury bonds are long
term for 5, 10, 20 or 30 years. They are
considered low risk.
• Corporate bonds – long term debt
securities issued by companies or
corporations.
• Municipal bonds – debt securities to
municipalities or other government units.
They are used to fund community projects
• Equity securities – certificates of stock
representing part ownership in a company.
• Share and stock certificates
• Certificates of deposit
Stock exchange/stock
market

• The stock exchange

facilitates the trading of
companies’ stock. A
company’s assets can be
divided into shares. A share
represents a share in the
company.
Why do people buy stocks?
Refer to you textbook and make notes on the
following: Main aims, Advs, Disadvs,
Credit Union
Development Bank
Insurance Company
Mutual Fund
Building Society
Investment Trust Company
Informal credit institutions (Sou Sou, Box, Partner, Sindicatos, Meeting Turns).
 • Credit unions are owned and controlled by the
people, or members, who use their services. Your
vote counts. A volunteer board of directors is elected
by members to manage a credit union. Credit Unions:

• encourage members to save money.

Credit Union • offer loans to members.
• charge lower rates for loans (as well as pay
higher dividends on savings) because they are
nonprofit cooperatives
• return earnings to members in the form of
dividends or improved services.
 Advantages
and
Disadvantages
Development Bank

Aims to facilitate This is

growth and accomplished via
production in a loans at
particular sector. competitive rates.
 • Guarantees compensation for loss of life or
Insurance Company property or for damage or illness in return
for a monthly premium.
 Collective investment company.

Mutual An individual can buy shares in a fund

and receive dividends in return.
Fund
Main advantages – professionally
managed, able to invest in securities
which you might otherwise be unable
to diversification of risk.
Informal
Institutions
• Sou Sou, Box, Partner, Sindicatos,
Meeting Turns