3.

1 Money & Banking

Barter system: It is known as the initial stage of exchange through which goods and services are
exchanged with other goods and services.
Disadvantages
1. Lack of double coincidence of wants
2. Lack of division
3. Lack of store value
4. Lack of measure of value
FUNCTIONS OF MONEY
• A medium of exchange
Without money, it becomes necessary for buyers and sellers to barter (exchange goods). Bartering
is problematic as it requires two people to want each other's goods (double coincidence of wants). Money
easily facilitates the exchange of goods as no double coincidence of wants is necessary.
• A measure of value
Money provides a means of ascribing value to different goods and services. Knowing the price of
a good in terms of money allows both consumers and producers to make decisions in their best interests.
Without this measure, it is difficult for buyers and sellers to arrange an agreeable exchange.
• A store of value
Money is the most liquid asset; money holds its value over time and this means that money can
be saved and it remains valuable in exchange over long periods of time. It is a convenient way to store
wealth.
• A means of deferred payment
Money is an acceptable way to arrange terms of credit and to settle any future debts. This allows
producers and consumers to acquire goods in the present and pay for them in the future.
THE CHARACTERISTICS OF GOOD MONEY
1. Divisibility: To be valued medium of exchange, currency must be divisible.
2. Acceptability: The currency must be valued and widely accepted by society as a valid way to
pay for goods/services
3. Durability: The currency must be robust, not easily destroyed and last for a long period of time
4. Scarcity: the supply of the currency should be such that it remains desirable and retains its
value in the market. Oversupply would decrease its worth.
5. Portability: good currency is easy to carry
FUNCTIONS OF CENTRAL BANKS
 1. Implementation of monetary policy: central bank holds meetings with officials from other
banks to determine interest rates and quantity of money supplied in the economy
2. Banker to the government: The central bank manages the tax receipts and payments, while the
govt sets the annual budget. Government can deposit their money in central bank and withdraw loans
from there.
3. Lender of last resort: Commercial banks are able to borrow from the Central bank when they
run into short-term liquidity issues. Without their help, they may go bankrupt leading to instability in the
financial system - & a potential loss of savings for many households
4. Regulation of the banking industry: the high level of asymmetric information in financial
markets require that commercial banks are regulated in order to protect consumers
5. Maintain the stability of the national currency and money supply as well as issuing bank notes
The functions of commercial banks (high-street banks) – Commercial banks play a central role in
financial markets
1. They facilitate saving : storing money for future use is essential for households and firms. It
also provides a pool of money that financial institutions can lend.
2. They lend to businesses & individuals: access to credit is a key requirement for economic
growth & development. Being able to borrow money speeds up consumption by households and
investment by firms. It also allows households or firms to purchase assets and pay them off over an
extended period of time
3. They facilitate the exchange of goods and services: each purchase of goods/services requires
the movement of money between at least two parties. Commercial banks provide multiple ways for this
exchange to happen including debit cards, credit cards and bank transfers
4. They provide forward markets in currencies & commodities: forward markets are also called
futures markets. They provide some price stability in commodity markets and enable investors to make a
profit by speculating on future prices
5. They provide a market for equities: equities are shares in public companies that are listed on
stock exchanges around the world. Commercial banks facilitate both long term investment and
speculation by providing platforms which connect buyers & sellers

Commercial banks provide services such as accepting deposits and offering loans.
Primary functions
• Accepting deposits: savings account, recurring account and fixed deposits
• Providing loans: overdraft facility, cash credit and long-term loans
Secondary functions: agency and utility functions to have locker facility to collect and clear cheques,
make payment of rent, insurance premium, foreign exchange, purchase and sell shares.
STAGES OF MONEY
1. Commodity
2. Metallic
3. Paper
4. Credit
5. Plastic

3.2 Households
Disposable income: amount of money a consumer is able to spend from their income after paying taxes.
Disposable income can either be saved or consumed on goods and services.
Factors affecting household spending and consumption
1. Changes to income
Consumption increases as disposable income increases and decreases as disposable income
decreases
2. Changes to interest rates
Interest rates are set by the government's central bank. Changes to the rate cause commercial
banks to change the lending rates they offer customers. If interest rates increase, then the cost of
borrowing increases. Higher borrowing costs = less consumption
3. Changes to confidence levels
The stronger the economy, the higher the consumer confidence. Consumers feel secure in their
jobs and are confidence of receiving regular salary payments. Therefore, consumption increases. In a
weakening or recessionary economy, consumer confidence falls. Consumers feel less secure in their jobs
and consumption decreases.

Factors affecting household saving

1. Changes to income
When disposable income increases, the proportion saved depends on the overall income level of
the household. Low-income households will spend any additional income on necessities or a few basic
luxuries - little additional saving occurs. Medium income households will increase both consumption and
savings. High income households will usually increase their savings or purchase more assets.
 2. Changes to interest rates
Changes to the base rate cause commercial banks to change the savings rate they offer customers.
An increase in the savings rate offered by commercial banks incentivizes households to save more. A
decrease in the savings rate offered by commercial banks disincentives from savings and encourages
consumption.
3. Changes to confidence levels
Households tend to save more when they are more fearful of the future. The stronger the
economy, the higher the consumer confidence and the lower the level of household saving. The weaker
the economy, the lower the consumer confidence and the higher the level of household saving.
Factors that affect borrowing
1. Changes to income
When disposable income increases, household borrowing often increases due to the ability to
make additional monthly payments. Low-income households find it difficult to access commercial bank
loans and if they need to borrow money, they face higher interest rate charges, or they turn to money
lenders.
2. Changes to interest rates
If interest rates decrease, medium and high-income households may decide to borrow more
money from commercial banks as it is now cheaper to pay. There will likely be an increase in personal
loans to fund travel, car purchases and home improvement. Low-income households are usually unable to
access borrowing from commercial banks due to having a lack for security, even when interest rates fall
and continue to borrow from sources that charge high interest rates.
3. Changes to confidence levels
When the economy is booming, confidence is high, resulting in more borrowing and
consumption. When the economy slopes down or stagnates, confidence falls, resulting in less borrowing
and consumption.