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An Overview of Money
is anything that is generally accepted as a medium of exchange. The sets of assets in an economy that people regularly use to buy goods and services from other people.
• Money is not income, and money is not wealth. Money is: • a means of payment / medium of exchange
• a store of value
• a unit of account
What is Money?
Barter is the direct exchange of goods and services for other goods and services.
A barter system requires a double coincidence of wants for trade to take place. Money eliminates this problem. As a medium of exchange, or means of payment, money is generally accepted by buyers and sellers as payment for goods and services.
. money serves as an asset that can be used to transport purchasing power from one time period to another.What is Money? As a store of value.
. money is a standard that provides a consistent way of quoting prices.What is Money? As a unit of account.
and easily exchanged for goods at all times. .What is Money? Money is easily portable. The liquidity property of money makes money a good medium of exchange as well as a store of value.
must last a reasonable length of time before deteriorating Divisibility -.people must be willing to accept it as a means of payment and in settlement of a debt Durability -.to function as money an asset must be capable of division into smaller units to accommodate transactions of differing value .Characteristics of MONEY Acceptability -.
small to carry around and easy to transfer ownership Uniformity -.in order to fulfil its various functions (especially as a store of wealth and as a means of evaluating future payment). it must retain its value Hard for Individuals to Produce Themselves -.money of the same value must be of uniform quality Stability of Value -. it must be light.Characteristics of MONEY Portability / Convenience -.to function as money an asset must be portable and easy to use.it must be hard to forge .
. silver. nonmonetary uses..g. e. Coins. gold.g. cigarettes. Fiat Money/token money -. but it also had other uses ranging from jewelry to dental fillings. For hundreds of years gold could be used directly to buy things. Something that performs the function of money and also has alternative. currency and checkable deposits (current account) . Something that serves as money but has no other important uses.FORMS of MONEY · Commodity Money – money that takes the form of a commodity with intrinsic value.money without intrinsic value that is used as money because of government decree. e.
Definition of Money Supply (M1. M2 and M3) · Definition of Money Supply: the quantity of money available in the economy Definition of Monetary Policy: the setting of the money policymakers in the central bank supply by .
consists of currency outside banks plus checking accounts plus traveler’s checks Currency held outside banks – includes coins and paper money in the hands of public Checking accounts – balances can be withdrawn by using check Traveler’s check – issued in specific denominations. these are treated as cash M1 = currency held outside banks + checking accounts + traveler’s check . M2 and M3) M1 – the narrowest definition of money supply.Definition of Money Supply (M1.
it includes all of the components of M1 plus time deposits and savings deposits Time deposits (fixed deposits) – interest-earning deposits with a specified maturity. which are subject to penalty for early withdrawal * Savings deposits – interest-earning deposits with no specific maturity * M2 = M1 + time deposits + saving deposits .Definition of Money Supply (M1. M2 and M3) M2 – A broader definition of money supply.
deposits of finance companies and post office saving) .Definition of Money Supply (M1. M2 and M3) M3 = M2 + deposits with non-bank financial institution (e.g..
he or she is simply deferring payment for the item serves as a temporary medium of exchange but not a store of value . when a person uses a credit card.CREDIT CARD ??? is not a form of money.
and investors to whom they make loans .BANKING Structure of Banking System Central bank : * an institution designed to oversee the banking system and regulate the quantity of money in the economy Financial institution : * privately owned institutions that serve the general public * intermediaries that stand between savers from whom they accept deposits .
2. 5. Banker to commercial banks (banker’s bank) Banker for the government Controller of money supply Lender of last resort Others .Functions of Bank Negara Malaysia 1. 3. 4.
deposits in banks are considered as liability in banks’ balance sheet as deposits are held in banks. To understand this process. and therefore. Assets are things a firm owns that are worth something. Most important among a bank’s assets are its loans. A firm’s liabilities are its debts-what it owes.Credit Creation To explore a process on how banks create money. you need to be familiar with some basic principles of accounting. A bank’s most important liabilities are its deposits. the money supply . the behaviour of banks can influence the quantity of deposits in the economy.
Assumption: * currency is the only form of money * total quantity of currency is RM100.Credit Creation Simple Case of 100-Percent-Reserve Banking Definition of Reserves: deposits that banks have received but have not loaned out. and therefore * the supply of money is RM100 .
Credit Creation Simple Case of 100-Percent-Reserve Banking the bank will keep the deposits until the depositor comes to withdraw or write a check against his balances therefore. all deposits are held as reserves 100-percent-reserve banking FIRST NATIONAL BANK Assets Reserves RM Liabilities 100 Deposits RM 100 .
actual reserves .Money Creation Fractional-Reserve Banking Definition of fractional reserve banking: a banking system in which banks hold only a fraction of deposits as reserves the fraction of deposits that banks hold as reserves Definition of Reserve Ratio: bank reserves consist of cash in the bank plus its deposits at central bank (BNM) The required reserve ratio is the ratio of reserves to deposit that banks are required . to hold A bank’s required reserve = deposits x required reserve ratio Therefore.required reserves = excess reserves . by law .
Panel 1 ASSETS LIABILITIES Panel 2 ASSETS LIABILITIES Panel 3 ASSETS LIABILITIES Reserves 0 0 Deposits Reserves 100 100 Deposits Reserves 100 500 Deposits Loans 400 .Money Creation Fractional-Reserve Banking If the required reserve ratio is 20%. the bank has made loans of $400. the bank can have up to $400 of additional deposits. The $100 in reserves plus $400 in loans equal $500 in deposits. the bank has excess reserves of $80. With $80 of excess reserves. In Panel 3. there is an initial deposit of $100. Balance Sheets of a Bank in a Single-Bank Economy In Panel 2.
80 64 Deposits .Money Creation Fractional-Reserve Banking The Creation of Money When There Are Many Banks Panel 1 ASSETS Reserves 100 Panel 2 ASSETS Reserves 100 Loans 80 Reserves 80 Loans 64 Reserves 64 Summary: Bank 1 Bank 2 Bank 3 Bank 4 . . .00 Reserves 12. 500. .20 . Total Panel 3 ASSETS Reserves 20 Loans 80 Reserves 16 Loans 64 LIABILITIE S 100 Deposits LIABILITIE S 180 Deposits LIABILITI ES 100 Deposits Reserves 80 80 Deposits 144 Deposits 80 Deposits Reserves 64 64 Deposits 115.20 Deposits Deposits 100 80 64 51. .
.The Money Multiplier Summary: Bank 1 Bank 2 Bank 3 Bank 4 . Each dollar increase in reserves could cause an increase in deposits of $5 when there is no leakage out of the system. . . Total Deposits 100 80 64 51. 1 Money multiplier = Required reserve ratio • In the example above. the required reserve ratio is 20%. An additional $100 of reserves result in additional deposits of $500. . .00 The money multiplier is the multiple by which deposits can increase for every dollar increase in reserves.20 . 500.
MONETARY POLICY Definition of Monetary Policy: the setting of the money supply by policymakers in the central bank. The mechanics of monetary policy include all the measures which influence the supply of money the price of money (the rate of interest) .
unemployment will occur * To achieve full employment of resources .MONETARY POLICY 2 types of monetary policy * contractionary. workers will be retrenched. restrictive or tight monetary policy * expansionary or cheap monetary policy Aims of monetary policy * to maintain stability of domestic prices * fluctuating prices will cause disturbances in economy * to achieve higher rates of economic growth * to eliminate fluctuations in productions and employment * if demand is too low.
1. Open-Market Operation (OMO) Definition of Open Market Operations: the purchase and sale of government securities in financial market so as to influence the size of bank deposits. .includes the required reserve ratio.MONETARY POLICY Tools of Monetary Control Quantitative tools . Government has authorized the BNM to buy and sell government securities. the discount rate and open market operations where the central bank can estimate what amount of money supply will be affected.
it raises the money multiplier and increases the money supply * a decrease in reserve requirements means that lowers the reserve ratio banks hold less reserves have excess reserves to be lent out . it raises the reserve ratio. lowers the money multiplier.can loan out less of each RM that is deposited * as a result.banks must hold more reserves and .MONETARY POLICY Tools of Monetary Control 2. Reserve Requirements * regulations on the minimum amount of reserves that * an increase in hold against means that banks must reserve requirementsdeposits . and decrease the money supply * * * * as a result.
000.000.000 There is an inverse relationship between the required reserve ratio and the money supply . money created = RM1.000.000 (money supply-original deposit) MONETARY POLICY Tools of Monetary Control iif r = 50% and original deposit RM1. if r = 20% and original deposit RM1. then money supply = 1/r @ RM1. then money supply = RM2.000 = RM5.000 money created = RM4.
MONETARY POLICY Tools of Monetary Control 3. the banking system has more reserves and this allow to • create more money BNM can alter the money supply by changing the discount rate . Discount Rate Banks may borrow from BNM The interest rate on the loans that BNM makes to banks is called • the discount rate a bank borrows from BNM when it has too few reserves to meet • reserve requirements this might occur because the bank made too many loans or it has experienced recent withdrawals therefore.
Funding term given to the conversion of short term loans to medium term loans or long term loans objective to lengthen the payment so that the bank cannot create multiple credits 5. Special Deposits · commercial banks are sometimes required to deposit in the central bank an additional percentage of their deposits however.MONETARY POLICY Tools of Monetary Control 4. this tool is not used in Malaysia .
MONETARY POLICY Tools of Monetary Control Qualitative tools Selective Credit Control Moral suasion Special directives Interest rate policy Mortgage control .
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