TUNKU ABDUL RAHMAN UNIVERSITY OF MANAGEMENT AND

TECHNOLOGY
FACULTY OF ACCOUNTANCY, FINANCE AND BUSINESS
SECOND SEMESTER
2022/2023

BBBE2013 MONEY AND BANKING

Tutorial 1: Introduction

1. Why do banks and other financial intermediaries exist in modern society,

according to the theory of finance?

According to the theory of finance, banks and other financial intermediaries

exist in modern society to help overcome the problems of information
asymmetry and transaction costs in financial markets.

They do this by gathering and analysing information about potential borrowers

and lenders, providing monitory and enforcement mechanism, and offering
standardized contracts and terms.

By reducing these costs and improving information flow, financial

intermediaries help to promote the efficient allocation of capital and resources
in the economy.

2. Suppose we define money as that which serves as a store of value. Explain

why this is a poor definition.

Define money as that which serves as store of value is a poor definition

because money serves several other important functions besides being a store
of value.

Money is also a medium of exchange, which means that it can be used to

facilitate transactions of goods and services. It allows buyers and sellers to
avoid the problems of barter, where they would need to find someone who
wants what they have to trade. Instead, money provides a standardized and
widely accepted means of exchange that can be used to buy any goods and
services.

In addition to being a medium of exchange, money also serves as a unit of

account, which means that it provides a standard measure of the value of
goods and services. It allows for easy comparison of the relative values of
different goods and services and facilitates economic calculation and planning.

Therefore, while money can certainly be store of value, this function alone
does not fully capture the importance of money in the economy. A more
comprehensive definition of money should include its functions as a medium
of exchange and unit of account.

3. Suppose something is functioning as money within an economy. What could

cause the population to lose confidence in the value of the means of payment?
What do you think would happen as a result?
 If people start to lose faith in the value of the money being used in an
economy, it can lead to problems. This can happen if the money loses its value
too quickly, or if people are worried about the future and don’t trust the
institutions in charge of the money.

If this happens, people may stop using the money, which can cause its value to
decrease. This can make prices go up, which can hurt people’s ability to buy
the things they need. It can also cause economic problems and social unrest. If
things get really bad, the entirely monetary system could fail, which would be
very bad for everyone.

4. Why were people in the United States in the nineteenth century sometimes
willing to paid by cheque rather than with gold, even though they knew there
was a possibility that the cheque might bounce.

People in the United States in the nineteenth century sometimes willing to paid
by cheque rather than with gold because it was a more convenient and flexible
means of payment.

Carrying physical currency, like gold, could be risky and checks offered an
alternative to this. Checks also allowed for transactions over long distances,
and provided flexibility in payment by allowing post-dated checks. Although
there was a risk that the check might bounce, the convenience and flexibility
of using checks outweighed the risk for many people.

5. The term “bank” has been applied broadly over the years to include a diverse
set of financial-service institutions, which offer different financial-service
packages. Identify as many of the different kinds of bank as you can and tell
us the important role of each of them.

Type of
Bank Description Services

Offers a wide range of financial Checking and savings accounts, loans,

Commercial services to individuals, businesses, mortgages, credit cards, and other financial
Bank and other organizations. services.

Underwriting and issuing of stocks and

Specializes in helping businesses and bonds, advisory services on mergers and
Investment governments raise capital through the acquisitions, and other financial
Bank issuance of securities. transactions.

Oversees monetary policy and

regulates the banking system in a Lender of last resort, sets interest rates, and
Central Bank country. regulates the banking system.
 Type of
Bank Description Services

Checking and savings accounts, personal

Serves individual consumers rather loans, mortgages, credit cards, and other
Retail Bank than businesses or organizations. financial services.

Focuses on personal relationships with

Community A smaller bank that operates within a customers and may offer more
Bank specific geographic area. personalized services.

Member-owned financial Lower fees and better interest rates to

cooperatives that provide many of the members, checking and savings accounts,
Credit Union same services as traditional banks. loans, mortgages, and credit cards.

Offers personalized banking and

wealth management services to high- Tailored financial planning, wealth
Private Bank net-worth individuals and families. management, and investment services.

This table summarizes some of the different types of banks, their descriptions, and the
services they offer.

6. What factors have slowed down the movement to a system where all payments
are made electronically?

Factors Description

Resistance to Some people are resistant to adopting new technology and prefer to stick with
change traditional payment methods such as cash and checks.

Security Many people are worried about the security of electronic payment systems,
concerns particularly in light of recent data breaches and hacking incidents.

Lack of In some areas, particularly in rural or low-income communities, there may not
infrastructure be sufficient infrastructure to support electronic payment systems.

Some businesses and individuals may find it more expensive to use electronic
payment systems than traditional payment methods, particularly for smaller
Cost transactions.
 Factors Description

There may be regulatory barriers or restrictions that make it difficult for some
Regulation people or businesses to adopt electronic payment systems.

7. Discussion: Can you think of any financial innovation that has affected you
personally? Has it made you better off or worst off? Why?

One financial innovation that has had a significant impact on individuals is

online banking. With the rise of online banking, it has become much easier for
people to manage their finances, including checking account balances, paying
bills, and transferring funds, all from the convenience of their computer or
mobile device. This has made banking more accessible, efficient, and
convenient for many people.

Personally, I think online banking has made my life easier and better off
because it has allowed me to quickly and easily manage my finances without
having to physically visit a bank or use paper checks. However, some people
may have concerns about the security of online banking, as well as potential
technical issues that could prevent them from accessing their accounts.
Overall, while financial innovations like online banking can be beneficial, it's
important to consider the potential risks and drawbacks as well.